Overhead expenses are a quick and common way to gauge the efficiency of a non-profit organization, and many people believe it is a necessary gauge, as well. But it is important to keep that statistic in the context of what an organization accomplishes with its overhead.
That was the key take-away from a recent LinkedIn poll commissioned by Barnes Dennig Senior Manager Jeff Schmitt, team leader of our Not-for-Profit Client Service Team.
Overhead can be a sensitive subject for non-profits, particularly at times like this when the need for services is so high and the competition for donations is so great. Many donors look at overhead expenses as they decide how much money to give and to whom they will give it.
We asked LinkedIn users, “Do you feel charities should be judged by the amount of overhead/management expense they carry?” Seventy three percent of respondents answered “Yes,” and 68 percent answered, “Yes, it gauges organizational efficiency.” When given the chance to expand on their answer, many non-profit leaders were quick to point out that the most important metric is not how much an organization spends on overhead, but how much it accomplishes within the community.
“I am a strong advocate for financial accountability and transparency,” one non-profit executive wrote, “but at best those define what a charity did, and not the results and not the value.”
Another non-profit executive expressed similar sentiments. “At the end of the day, I believe we owe it to our donors to measure this. It’s a way to differentiate and ensure a level of legitimacy,” he wrote. “All that being said, we also need to have other measures to ensure progress toward the stated mission is being made.”
Studies have shown a strong correlation between the funds spent on overhead and the productivity of an organization. As donors, government officials and charity watchdogs such as Guidestar, Charity Navigator and the Better Business Bureau continue to scrutinize an organization’s finances, it is increasingly important that non-profits are able to measure and communicate their impact in order to justify (and not simply cut) overhead.