Do Nonprofits Spend Too Much on Overhead? Most Americans Think So.

If I could bust all of the myths and misperceptions that Americans hold about nonprofits, I’m not quite sure where I would begin. The one about nonprofit employees not needing to make a decent salary? The one about us being expected to work in the seediest of office environments? The one about nonprofits not having to make money? Now that’s a really good one.

But the one that has me all roiled up is the one that nonprofits waste money. Waste suggests frivolous expenditures. Offices, for example, that are so far removed from “not seedy” that they rival the poshness of the most opulent corporate offices. It suggests flying first class when you could easily fly coach. It suggests five color printing when two colors would have done the job. That’s waste. Have I seen this in the sector? Absolutely. But truth be told, and you who toil in the nonprofit sector know this to be true, it is absolutely the rare exception, not the rule.

And just to clarify: waste is not fraud. What may be judged as wasteful can theoretically be done on behalf of the betterment of the organization: a better image, a reward for the staff, etc. It may be unethical, but it is not illegal. Fraud, on the other hand, is both unethical and illegal, and is done for the betterment of the individual(s) committing the fraud: art for the walls of the second home, a speed boat, limo rides and luxurious trips, a laptop for your child, a padded personal bank account for whatever the current whim dictates, etc. But, again, truth be told, fraudulent behavior is the rare exception, not the rule.

So, where is this misplaced perception of waste coming from? If we look at the report released last month by Ellison Research in Phoenix, the majority of Americans believe nonprofits waste money simply by running their organizations. Ellison’s survey of 1,000 adult Americans found that 62% of these adults believe that nonprofits spend “more than what is reasonable on overhead expenses such as fundraising and administration.” Excuse me, but expenditures for fundraising and administration are called running our businesses.

Now, please don’t get me wrong: I am the first to say that as nonprofits asking others to give us money in exchange for a promise that we will “do good, ” we have a serious obligation to use that money extremely wisely. But it is wise to run our organizations well, to hire the best and the brightest staff, to provide them with the supports they need to do their work, to spend money to make money, etc. I thought these were the mantras of all good businesses. Not to waste or defraud, but to use money wisely in pursuit of the organization’s mission.

According to the Americans surveyed in the Ellison study, the “reasonable” (and the study clearly states people were asked reasonable, not ideal) amount of money nonprofits should spend on overhead should be $.224 out of every dollar, compared to the $.363 on the dollar that people reported they thought nonprofits spend. (Thus the perception of waste.) How many of these people have ever run a nonprofit and know what it takes to do so?

Do they know that it takes more money, for example, to start a development function than to sustain one? Do they know that the amount of money you spend on overhead is likely to increase when you are involved in a capital campaign, or experiencing a growth spurt in your organization? Do they understand that more and more nonprofits are developing competitive compensation packages for employees? Do they understand that larger organizations may be able to bury their overhead costs in program costs more readily than smaller ones? And do they understand that because of this ridiculous emphasis on the idea that there is such a thing as a “right” or “correct” percentage of a dollar that should go for administration and fundraising, many nonprofits have become very creative at allocating those costs into program costs, just to keep that overhead ratio looking “reasonable”? Do they understand that by focusing on an arbitrary distribution ratio they are, in essence, “encouraging” nonprofits to engage in subterfuge? to be less than transparent? perhaps less than fully trustworthy? But the perception will be better!

Do they realize that by deciding that a random ratio—a ratio that is built not on particular information but on an uninformed call of what is reasonable—makes an organization less than trustworthy, they have created a self-fulfilling prophecy? That totally trustworthy organization, accurately reporting its overhead expenses, becomes untrustworthy as it works to report its financials to fit the magic formula.

And now the perception has, ironically, become the reality. Please, let’s bust that myth.