Nonprofit Organizations The Overhead Myth & Starvation Cycle

[Audio] Hello and welcome to this video presentation on Nonprofit Organizations, the overhead myth, and the starvation cycle by Mayra Banguera Vidal..

[Audio] The overhead ratio is a financial theory that has been influenced by nonprofit watchdogs. This ratio measures what percentage nonprofits spend on administration and fundraising, also known as overhead. If you want to calculate this ratio, you must total the administration and fundraising expenses and divide them by the total expenses of the organization..

[Audio] For this part we are going to calculate the overhead ratio for two different organizations. Organization One has total expenses of three hundred thousand dollars, fundraising expenses of fifteen thousand dollars, and administrative expenses of fifty thousand dollars. Organization number two has the same amount of total expenses, three hundred thousand but their fundraising expenses total thirty thousand and administrative seventy thousand dollars. Based on the formula mentioned before, what is the overhead ratio for each organization?.

[Audio] Remember that we calculate the overhead ratio by totaling administration and fundraising expenses and dividing them by the total expenses of the organization. For organization number 1 their overhead ratio is 9% while for organization number two, their overhead ratio is thirty-three percent. But what does that mean?.

[Audio] The typical overhead ratio is twenty to twenty-five percent, some scholars talk about fifteen and twenty percent; however, this financial theory has created a culture that praises organizations with low overhead costs because that means that the funder's money is being invested in services to fulfill the organization's mission, therefore some organizations have reduced overhead cost to attract more funders and some even brag about having no overhead cost or extremely low ratios..

[Audio] After many years of a culture where low overhead was praised by watchdogs' organizations, researches from the Urban Institute found that this practice is actual detrimental for nonprofit organizations as it has led to failing infrastructure which results in limited ability to fulfill their missions. When organizations do not invest in technology, training, or paying competitive salaries to their staff to have lower overhead and be more attractive to funders, long-term this organizational financial management practice hinders their ability to create sustainable growth. To counteract the effect of this culture, The Overhead Myth Project was started by some watchdog organizations trying to advise nonprofits of the risk of inadequate overhead practices. The project consisted of writing letters to organizations and donors across the United States to encourage them to not use the overhead ratio; however, organizations continue to use it and lack investments in infrastructure..

[Audio] The low overhead culture creates unrealistic donor expectations about how much it cost to run an effective nonprofit that led nonprofit organizations to cut in overhead spending. Further, this culture creates competitive pressure between organizations for the lower overhead ratio to become more attractive to donors, this can ultimately result in neglected infrastructure like poor training, obsolete computers or inadequate furniture, or to misleading reporting, underreporting their expenditures on tax forms and fundraising materials. This underspending and underreporting perpetuates funders' unrealistic expectations. Consequently, funders expect grantees to run their programs and accomplish their mission with less funds, creating a cycle that slowly starves nonprofits..

[Audio] The best way to break this cycle is to end it where it starts and that is with the donors' unrealistic expectations. If funders set more realistic expectations nonsprrofits will not feel pressured to underreport their overhead and also will feel more confident in investing in infrastructure. It is important to educate donors on the damaging consequences of the overhead myth. Be transparent about the funds needed to successfully run a program and include all those cost in proposal. Another proper action is to encourage and engage funders to give unrestricted gifts that way the organization can be more strategic and effective with funds allocation based on the organizations needs. Internally nonprofit leaders should also commit to understand their real overhead cost and real infrastructure needs to use this data when communicating with funders to better manage the organization's finances and be more effective fulfilling the mission..

[Audio] Thank you for watching and go be a great nonprofit leader!.