Changing the nonprofit narrative: Debunking the overhead myth (again)

If you work in the nonprofit sector, you’ve probably heard of the “overhead myth.” It’s the misconception that donors and funders can determine an organization’s effectiveness by comparing how much it spends on program-related costs—i.e., the money spent on programming and services—and how much it spends on “overhead”—i.e., staff, technology, rent, and utilities. This can lead to the mistaken assumption that organizations with the lowest overhead ratios are the most effective. In fact, NPOInfo’s charitable giving statistics found that 61% of donors claimed to choose nonprofits to support based on how “well” the organization utilizes funding.

But overhead is critical to nonprofits fulfilling their missions. GiveWell, which is known for focusing on effectiveness, disagrees with the idea that the overhead ratio by itself is a good indicator of anything. And in 2013, GuideStar (Candid’s predecessor organization along with Foundation Center), the BBB Wise Giving Alliance, and Charity Navigator jointly issued a call to stop using the overhead ratio to assess nonprofit performance. Let’s look at the implications of the overhead myth and how nonprofits can demonstrate their effectiveness and end this misconception.

Overhead costs are essential to nonprofit mission

Program-related vs. overhead costs

Let’s look at an animal shelter as an example. Program-related expenses may include spending on pet food, medical costs, and blankets for shelter animals. Overhead costs may include rent and utility bills for the facility, technology for staff to track and promote adoptions, and salaries for those caring for the animals, including vets. All of these expenses are essential for helping animals in need. Without overhead, it would be impossible for the staff to provide direct services—and for the shelter to achieve its mission.

Underinvestment in overhead costs undermine nonprofits

Not only is overhead a necessity for day-to-day operations; it’s an investment in the organization’s effectiveness and impact. Yes, nonprofits could spend only the bare minimum to run their programs so as to keep their overhead ratio low and look like they’re effective, but would their programs make a greater impact for it? No.

For example, limited investment in staff training and development can lead to high turnover and lack of a leadership pipeline, and weak IT infrastructure can cause crashes and loss of data. The most competitive companies wouldn’t make it without investing in people, technology, and infrastructure, so why do we expect nonprofits to deliver reliable outcomes without the same investment?

Many nonprofits do operate on a shoestring budget, but they could be even more effective if they had more to spend on salaries, technology, and facilities.

To be effective, nonprofits need to invest in people

For nonprofits to provide programs proven to make a difference and be resilient and sustainable, they need to invest in the people and infrastructure that make the mission possible. In the latest Social Impact Staff Retention survey, 67% of respondents said they were looking for new jobs or will be within a year. Among the top reasons for leaving were too much work and too little support, limited growth opportunities, and inadequate pay and benefits. The Building Movement Project’s 2022 survey also found that over 60% of nonprofit workers overall reported experiencing a demanding workload “often” or “always.”

How to correct the overhead myth

So, if it’s clear that investment in overhead costs is essential to nonprofit effectiveness, why does the myth persist? According to Foundation Group, it’s partly because donors want easy assurance from statements like “90% of every dollar goes to programs,” and partly because nonprofits worry that if they disclose higher overhead, they will lose donors.

Here’s what you can do to defend your nonprofit against this misperception:

• Communicate how overhead expenses contribute to your mission, such as pointing out that your rent payments ensure you have a place to provide direct services.
• Share metrics that show your impact (and explain why it’s a better measure than overhead). You could highlight the number of people served and how their lives have improved.
• Be transparent about your finances and impact (bonus: filling out your Candid nonprofit profile is a great way to do this). When people can’t easily find your financials online, they may make inaccurate assumptions about your use of funds.
• Don’t use the term “overhead” without explaining; your audience needs to know what you’re talking about. Instead, focus on the staff, technology, and infrastructure that make the work possible.

It’s important to be transparent about your organization’s expenses, because if you don’t tell your nonprofit’s story, others will. By clearly explaining how much you spend and for what purpose, how each of those expenses support the vital work you do, and how that work is making a difference, you help counter the overhead myth. By taking the time to correct the misperception, you raise public awareness of the value of nonprofits and understanding of their mission-driven work and the people behind it.

This article is part of our “Mission over myth” series seeking to break down myths and misconceptions about the nonprofit sector.

Photo credit: Gorica Poturak/Getty Images