The Overhead Myth

by Matthew Lemberg, Executive Director, The Boys & Girls Clubs of the Casa Grande Valley

How much of my money will go directly to the kids?” This question (and all of the other variations of it I have heard) makes me cringe. It’s based on an outdated belief that financial ratios are the best and/or only indicator of nonprofit success.

Repeatedly hearing this question a few times each year for the past 15 years (and again a few weeks ago), I don’t think this is true (and neither does our organization). After reading this article I am confident I can communicate this position in a way that will lead you to agree with me, too.

In 2014, the leaders of our country’s three leading sources of information related to nonprofits — BBB Wise Giving Alliance, Charity Navigator and GuideStar — wrote an open letter to the Donors of America that outlined the misconceptions perpetuated by the “overhead myth.” The basic myth being that nonprofits with high administrative overhead are not good stewards of donor’s money. The letter, in its entirety, can be found next to this article, but in summary, it encourages donors to judge nonprofits by an entirely different set of metrics, such as governance, leadership, results and transparency.

Please know that I am not saying that looking at an organization’s overhead ratio is a waste of time. In fact, it is quite valuable in that it can expose fraud or poor financial management practices, but instead of encouraging nonprofits to spend less on overhead, the writers of this letter argue that many charities should spend more.

“Overhead costs include important investments charities make to improve their work — training, planning, evaluation and internal systems — as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself or to improve itself.”

A few years ago, we spent an entire board meeting discussing this topic after not receiving a grant due to high administrative costs. After much discussion, our board adopted the mindset that we would focus on impact and results instead of only focusing on maintaining low administrative and fundraising costs.

For the last four years we have intentionally made decisions allowing us to have the greatest impact on the lives’ of the members we serve. Some of the decisions made include:

Opening two new Boys & Girls clubs (we now have five).

Increasing from serving 400 members each day to serving almost 600 members daily.

Increasing annual operating expenses by nearly $240,000.

Increasing the percentage of administrative and fundraising expenses by 7 percent.

According to the overhead myth, which uses a very narrow metric, our organization is worse off today than it was four years ago based on the idea that because we have opened more locations, we are spending more on payroll staffing. On the other hand, when you look at the statements I just made, it’s impossible to come to this conclusion. We are having a greater impact on more kids today than we were four years ago while remaining fiscally responsible. Like I said, we want our greatest focus to be on impact and results. We have decided that we are in the “social change” business and not the “low overhead” business.

So … what do I want you to do with this information moving forward? I want you to keep (or start) supporting nonprofits like our organization (check out our tax credit ad to the right — the donation doesn’t cost you anything.

Instead of focusing on the overhead myth, ask questions like, “How will my money make a difference?” or “What will you be able to accomplish with my donation?” The answers will help you to decide if your money will be well spent in helping the children of our community.

I know if you give me an opportunity to share the successes of our programs your next question will be: “How can I help?” For more information on how to make a donation, log on to azdor.gov/tax-credits/contributions-qcos-and-qfcos.

Matthew has been the executive director of the Boys & Girls Clubs of the Casa Grande Valley since 2005. He holds a Bachelor of Arts Degree (Business Management) from Whitworth University and a Masters of Business Administration from Northern Arizona University.