Because most donors want to ensure that their gifts are well spent, many are concerned about the level of expenditures on overhead and fund-raising. In other words, how much money is spent providing programs and services, and how much is spent on renting an office, paying staff, and sending out fund-raising appeals?
The question is obvious and important; the answer is far from simple, for several reasons: First, there is no universal formula for calculating overhead. The chief executive's salary is a good example. Many people would consider it overhead; others would argue that since the chief executive deals primarily with program-related issues and is essential to the success of the organization, the executive’s salary is a program expense. Second, there are no generally accepted standards for what levels are acceptable. Many organizations boast that they spend only five or six percent of their funds on overhead; other well-known and effective nonprofits spend 25 or 30 percent on overhead.
Cost-effectiveness is an important consideration for all nonprofits. Here are some additional factors to consider when evaluating overhead and fund-raising expenditures:
- What is the mission of the nonprofit? Some activities, such as employment counseling or collecting and distributing blood, are labor-intensive and require a high level of staffing. It’s not necessarily more efficient to use volunteers to provide such services, since volunteers require management and supervision. When evaluating effectiveness, it’s important to understand the organization’s nature and purpose. An operating foundation, for example, may look hopelessly inefficient at first glance, until you realize that it exists to carry out programs, not to give away money.
- What environment does the organization operate in? Two organizations with identical missions might have very different cost structures if one operates downtown and the other serves a distant suburb. Does the organization's level of overhead expenses seem reasonable given its location, the number of people it's serving, and the manner in which it’s providing services?
- How does the organization raise money? Some methods of fund-raising are simply more expensive than others. An organization that raises most of its money through direct mail or special events may have higher fund-raising costs than a nonprofit that relies primarily on large grants. In evaluating fund-raising effectiveness, keep in mind that some activities are important for their educational value and their ability to involve greater numbers of people with the organization-intangible benefits that won’t show up on a balance sheet.
