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Don’t Judge a Nonprofit By Its Overhead
When we walk into an Apple Store, local charity expert Laura Deitrick likes to say, we don’t worry about the cost of the store’s lease or how much the gang at the Genius Bar makes per hour. Instead, we just want to know what a product is going to do for us and whether it’s worth the price. In other words, we care about the outcome.
But when donors look at nonprofits, Deitrick says, they sometimes do the exact opposite: They focus solely on overhead costs and not on the ways the charity serves the community.
“People want to understand if a charity or nonprofit is worthy of their donation. That’s good,” says Deitrick, associate director of the Institute for Nonprofit Education and Research at the University of San Diego. “But overhead is just one piece of information, and it doesn’t fully measure how effective or efficient an organization is. Furthermore it says very little about whether causes and people in need are effectively being supported. Outcomes, not overhead, are the true measures that deserve our attention.”
Understanding Nonprofits’ Real Cost
Those of us who support nonprofits should keep this in mind when we consider which charities are most deserving of our donations of time and money.
But how can we make this shift in donor mindset a reality? That’s what the Real Cost Project, an initiative of San Diego Grantmakers and its sibling associations in L.A. and San Francisco, is trying to do.
The goal of the Real Cost Project is to increase the number of grantmakers committed to funding all aspects of a nonprofit’s operations.
Both a “will building” and “skill building” initiative, the Real Cost Project consists of two phases. The objectives of Phase 1 were to raise awareness about the need for real cost funding, identify the barriers to this practice, and determine solutions for overcoming those barriers.
A review of academic research, qualitative focus groups with funders, and a series of forums throughout the state found that “grantmakers need to examine their current practices – both formal and informal – and engage in authentic conversations with their grantees about what it really costs for them to do their work,” says Nancy Jamison, San Diego Grantmakers’ President and CEO. “We also learned that training on nonprofit financial modeling is needed for folks that work in philanthropy at all levels.” This type of training, says Jamison, is Phase 2 of the initiative.
While training and education will help, she says, “funders cannot do all this learning in a vacuum. Nonprofits also have an opportunity to gain new tools about how to report their finances so they can understand and accurately provide their various cost components.”
Nonprofits Are Economic Engines, Too
“Somehow, news of a few mismanaged nonprofits has led to this general assumption that there’s a wider pattern of misuse of contributions,” Jamison says. “Perhaps this is due to an incorrect belief that nonprofits are not businesses with staffs to pay and infrastructure to support, but rather simply charities that are fueled only by volunteers and good intent.”
And like businesses, nonprofits’ operating costs contribute to the economy in the form of jobs, procurement of goods and services, paying rent, and more.
Furthermore, the 2016 State of Nonprofits and Philanthropy in San Diego report from the University of San Diego’s Caster Family Center for Nonprofit and Philanthropic Research finds that nonprofits account for 9 percent of total employment in the county and 7 percent of all wages. Average quarterly nonprofit employment rose by 6 percent from 2010-2014.
So support for nonprofit overhead means economic benefits in addition to their social and environmental benefits.
After all, without nonprofits, we wouldn’t have Balboa Park or world-class universities. Valuable cultural and workforce programs, services for homeless and other vulnerable populations, and many similar community needs that nonprofits fulfill would be gone too.
“Nonprofits,” Deitrick says, “make San Diego a great place to live.”
What Should Donors Do When Donating to a Nonprofit?
Here are some tips for performing due diligence when considering making a donation of time or money (or both) to a nonprofit:
- Ask questions and expect answers
“Reach out to nonprofits that you believe in — with your head and with your heart — and ask them for measures of success,” Jamison says. “Look for both hard facts and illustrative stories that demonstrate what they are doing. And talk to them about how your investment could help them build the kind of strength and capacity they need to do the work even better than they do now.”
- Consider overhead as one component
“Understand the big financial picture, how the whole enterprise functions, and don’t limit your focus to just the food they are providing for hungry families or the books or backpacks or medical supplies,” Jamison says. “Also consider the staff that makes this work possible, the building they work in, the technology to ensure everything runs smoothly.”
- Back off if you’re not satisfied…
“If a nonprofit can’t tell you what they’re producing, what their impact is in the community,” Deitrick says, “don’t give to them.”
- … But give generously if you like what you hear
“You may wish to give flexible donations — often called general or operating support — so that they can identify the highest needs and really dig in and do the work,” Jamison recommends. “However you choose to donate, you should feel confident that you’ve made an informed decision about where your dollars belong.”
Call To Action
Here are five helpful resources for more about nonprofit outcomes and overhead:
- The Overhead Myth, an initiative led by charity rating agencies GuideStar, BBB Wise Giving Alliance, and Charity Navigator
- The Real Cost Project, an initiative of Northern California Grantmakers, San Diego Grantmakers, and Southern California Grantmakers to increase the number of grantmakers committed to funding all aspects of a nonprofit’s operations
- The Nonprofit Overhead Project, an initiative of CalNonprofits to educate nonprofits about how to adequately budget – and ask for funding for – the full cost of providing services
- Video: “If We Want Our Funding to Change the World,” part of Forefront’s “Real Talk About Real Costs” initiative
- #OwnYourOwnCosts, an initiative of the National Council of Nonprofits