The Everyday Philanthropist

CHAPTER 18Overhead Ratios Weaken Charitable Services and Programs

When a charity becomes obsessed with keeping overhead costs down, they often forgo investment in the essential people, equipment, and training required to provide good services to their clients and/or to make solid progress toward their goals.

The Nonprofit Overhead Cost Study conducted by Indiana University explored what can happen when incentives are twisted to reward how little a charity spends rather than how much it achieves. They pointed to a specific case of “a hotline that could not afford to upgrade its phone system—an expense that was considered part of overhead. Without this upgrade, a suicidal caller could get a busy signal, even though some hotline extensions were not busy. It is hard to imagine a better example of sacrificing the mission on the altar of low overhead.”

In other cases, the study observed that: “Nonprofits in the arts, community development, and human services describe how their development efforts were hindered by inappropriate donor database software. One site described the unproductive downtime and frequent maintenance associated with ‘free’ but mismatched, outdated computers. In agencies where key positions such as development director either did not exist or were filled with inexperienced staff, the CEO had to fill that role, thereby neglecting parts of the leadership role. Sites without experienced finance staff had only rudimentary financial reporting and had limited ability ...