Today’s “overhead ratio” sparring match: Nonprofit Quarterly versus Nonprofit Quarterly.

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For today’s lineup we have Claire Knowlton arguing charities should be funded for the full cost of their operations (including building cash reserves, additional reserves for new opportunities, and repaying debt) in order to remain healthy versus Ruth McCambridge and Alexis Buchanan body slamming Wounded Warrior Project because one line item on the 990 is more than what a couple of media reporters decided it should have been.

Let’s check out the NPQ versus NPQ match:

In this corner…

1/25 – Claire Knowlton at Nonprofit Quarterly – Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs – In order to be able to continue delivering services to clients, charities need to be healthy enough that they can pay all their bills and have the ability to respond to opportunities.

Author suggests grants to charities should cover all of their costs, not just the immediate program under discussion in a proposal. Author introduces a new term, full cost, which is:

Day-to-day operating expenses + working capital + reserves + fixed asset additions + debt principal repayment = full costs


Good stuff for the nonprofit world – 5/8

A few articles on the nonprofit sector.

  • Do huge staffing levels in huge foundations have any impact on outcomes?
  • The widespread attitude towards ‘overhead’ that charities have to deal with.
  • How disaster reporting goes sour and what good outcome questions might look like in disaster relief.
  • Charities can now get dot-NGO and dot-ONG addresses.

Why do I mention the first two articles? They show the entire nonprofit world has a long way to go on outcome measures. I’m not sure there is even a tidbit of agreement on the right questions to ask, let alone measuring answers.

5/7 – David Callahan at Inside Philanthropy – Top Philanthropoids Are Paid Over $600 Million a Year. Is That Too Much? – Mr. Callahan is continuing his discussion I’ve mentioned here and here wondering if the humongous staffing levels at the gargantuan foundations makes any difference in the impact of those foundations.


Overhead ratios are the wrong way to look at charities

Dan Pallotta has a superb TED Talk explaining the fallacies of using overhead as a measure for charities: The way we think about charities is dead wrong.

[ted id=1688]

Just a few highlights to share along with my observations (comments in italics are my paraphrase of his points):

We have created different rules for the for-profit world and the charity world. There are five areas of discrimination: (more…)

We need a new way to evaluate charities – Part 2

Previous post discussed explained that is a major point by Mr. Dan Pallotta in two articles he wrote:

His main point is the excessive focus we as a society have evaluating organizations based on their “overhead” ratios and our intolerance for NPOs paying market salaries.  The unintended consequence is that we are restricting organizations from getting the money to have the full impact they could realize.

Action plan


We need a new way to evaluate charities – Part 1

That is a major issue for Mr. Dan Pallotta. He suggests the excessive focus we as a society have on rating the effectiveness of NPOs by “overhead” ratios and our intolerance for NPOs paying market salaries are restricting organizations from getting the money to have the full impact they could have.

I read two articles by Mr. Pallotta on the same day. Please check them out.

Why Can’t We Sell Charity Like We Sell Perfume, from the Wall Street Journal.

Charities Must Battle Public Misconceptions About Overhead Costs, from the Chronicle of Philanthropy.

In the WSJ article he says:

We have two separate rule books: one for charity and one for the rest of the economic world. The result is discrimination against charities in five critical areas.


Another article on donated meds and overhead ratios – the impact of substitution on our thinking process

An Op-Ed in the Los Angles Times by Jack Shakely, president emeritus of the California Community Foundation, discusses the impact of donated medicines on the functional allocation:  The worst way to judge a charity.

A friend of his was grouching about another NPO buying meds for $0.10 a pill and booking them as GIK revenue at $7.00.  Mr. Shakely looked at the organization’s web site and found they claim 90% of the contributions go to program, with 5% to G&A. That leaves 5% for fundraising.

He then wonders why we are putting so much emphasis on the functional allocation as the main measure of an NPO.


“Nonprofit Starvation Cycle”

Stanford Social Innovation Review has a superb article on the cycle many NPOs have of starving themselves of critical infrastructure they need to be effective in their mission.

Superb summary: “The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. (more…)