Should your donations be used for overhead?

Should your donations be used for overhead?

Years ago, a couple came to me because they had received an inheritance and wanted help giving it away. As successful retirees, they already knew that they didn’t need the money for living expenses. They felt led to use this windfall to bless others, but they just didn’t know how to be wise about giving away the money.

As we talked about what they wanted and didn’t want to support, they expressed a sentiment I’ve heard many times before: “We want to make sure our donations aren’t used for overhead.”

This is an understandable concern. Have you ever given a small donation to a charity and received so many marketing pieces in the mail that you’re sure they are worth more than your original gift? Donors may worry that charities will take their dollars and, instead of deploying those dollars to those in need, use them for expensive marketing campaigns or unnecessarily high costs.

Websites like charitynavigator.com and charitywatch.org were created to rate organizations and identify those who use finances in an abusive manner. Charities strive for the “four star rating” and tout their standing as proof that donors can trust them. In response to donor pressure, charities tout what percentage of donations go directly to “the cause” instead of overhead. It’s assumed 100% would be ideal.

What qualifies as “overhead”?

The first time I personally heard this idea expressed by a donor, I worked at a charity. “Wait a minute,” I thought. “I’m overhead, aren’t I?” I reflected on how odd it was that the person speaking would tell me he loved my organization and loved what I did, but wouldn’t want to explicitly pay me to do it. It was obvious that the donor didn’t think of me as being overhead, even though I was.

There is confusion about the real definition of overhead. Typically, sites like Charity Navigator refer specifically to administrative and fundraising expenses. Administrative expenses include infrastructure and operations functions, like facilities upkeep, HR, and accounting. Fundraising usually consists of the work it takes to find and keep donors engaged: reporting, events, marketing, fundraising staff, and communication expenses.

To make things more complicated, a few charities have fudged their numbers in order to make themselves look more pleasant in the eyes of donors. These organizations categorize expenses in a way that is misleading at best and fraudulent at worst.

The wrong question

The problem is that we’re asking the wrong question. “What percentage of my donation goes to overhead?” is the wrong question to ask. Here’s a more effective question: “What will it take to do what I want to accomplish?”

“What gets measured gets managed,” operations experts say. By focusing too much on overhead, donors have shifted the conversation away from running effective organizations to running efficient organizations.

Efficiency is certainly a worthy endeavor. However, when it becomes the ultimate goal, impact on the cause itself is likely to suffer. A report published in the Stanford Innovation Review found that charities often get stuck in a “starvation cycle” by underfunding overhead in an effort to keep donors happy. According to the authors, this hesitance to invest in organizational health often leads to disastrous results, including poor employee performance and no long-term sustainability for the charity.

What would it look like if charities had freedom to focus on effectiveness instead? Would donors support systems that lead to more lasting, ongoing change and invest in hiring top-tier talent? This is what business leaders focused on success do. They know that there’s only so far that you can get by cutting expenses. The further you cut, the more you hamstring the organization and hurt its morale.

Charities exist to tackle fundamental flaws in our society. The problems they are trying to solve are not easily fixed. If there were simple answers to poverty, homelessness, sexual abuse, and diseases like cancer, those questions would have been answered already. It could be argued that the challenges charities face are often much greater than those solved in the market sectors. But donors insist on starving the teams focused on these difficult problems instead of building them up.

A better way

Not all donors act like this. A few years ago, several donor advocacy organizations started The Overhead Myth, a campaign to help educate philanthropists on this issue. Many others are catching on.

I personally notice an “aha moment” when successful business leaders leave the marketplace and join nonprofit teams. They realize what it’s like to sit on the under-resourced side of the table and manage in ways they never had to in the for-profit world.

When donors switch to an effectiveness-focused approach, they begin to ask questions like these instead:

  • What is the organization trying to achieve and how will this difference be demonstrated in measurable results?
  • What plan does the leadership team have in place to get to those results?
  • What roles do the organization need to fill in order to accomplish the plan?
  • Which individuals will most effectively fulfill that role, and what will it cost to hire them?
  • How are leaders managing organizational finances to build the resources needed for effectiveness and sustainability?
  • What financial oversight and protections against abuse are in place, such as independent audits?

Notice that financial stewardship is still a part of the process. In this approach, however, financial stewardship follows as a result of the main goal, instead of becoming the main goal itself. In fact, to achieve sustainability, I’ve seen strategic donors even give specifically to increase fundraising, in an effort to help charities reach a wider support base.

Giving with an eye toward effectiveness means being good stewards ourselves. It means entering into and engaging with charity leadership to understand complex issues. It means taking stewardship to a whole new level. At Sound Stewardship, we’re here with you every step of the way. Contact us today to learn how we can help you make the most impact with your giving.

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