Charity FAQs
How Much of a Charity's Budget Should Go to Overhead?
Overhead is the term used for expenses of a charity that are not the cost of an actual program or charitable activity. The overhead costs generally fall under the categories of administration, management, and fundraising.
What Are Typical Overhead Costs for a Not-for-Profit and Charity?
Some examples of expenses included in the overhead category:
- Office space
- Utilities
- Supplies and equipment
- Salaries
- Employee compensation
- Legal services and accounting fees
- Website
- Fundraising events
- Insurance
- Corporate governance
- Security
The US Better Business Bureau recommends charities spend no more than 35% on administration and fundraising. However, this number is not set in stone. This percentage may seem reasonable for some charities that have the ability to keep their overhead at 10-15% of their funding, but many others are bound to have higher overhead costs, closer to 20-35%.
Many people have an expectation that overhead be substantially lower than 35%. Studies have shown that donors perceive charities with high overhead rates as less effective in their work. Understandably, donors want to support a cause, not enrich the nonprofit director. However, it's unfair to judge a charity based solely on overhead costs. These financial ratios do not reflect the true impact of the organization. Charities do not need low overhead, they need to demonstrate high performance.
Does overhead reflect the effectiveness of a charity?
Overhead percentage isn't the only thing to consider when evaluating a charity's performance. There are many different reasons why one charity might seem better than another. Some charities have a direct mission, while others are parent organizations or foundations and don't do any of the work themselves. Furthermore, many charities do not report their overhead costs accurately either because they do not properly understand the differentiation between administration and charitable activities or they simply want to skew their ratio to attract donors. All these factors can affect the percentage of overhead, and therefore overhead costs will vary significantly between charities.
Focusing on one piece of a charity's performance can be harmful. It is crucial to consider all aspects of a charity's financial and organizational performance, because it is only through this comprehensive evaluation that the true value of an organization can be ascertained. Under-investing in critical areas can cause unintended consequences that lead to compromised quality or sustainability. As a result, the overhead ratio is not an accurate measure of how well a nonprofit is performing.
In fact, many charities could spend more money on overhead. The money goes to investments for the charity's future, such as training, planning, evaluation, and internal systems — and also to raise more money. This will allow the charity to get better at their work and sustain themselves.
Although overhead costs do not provide an easy way to measure charity accountability, they are necessary for the charity to function properly. Achieving transparency about overhead costs can be costly and time-consuming, but it's worth it for charities to do so because these costs are necessary for them to function well.
A charity's efficiency and effectiveness can be measured by focusing on the following four areas:
- transparency;
- governance;
- leadership; and
- results.
For more information on how low overhead can limit nonprofit effectiveness, read this article in the Stanford Social Innovation Review as well as this study from the Urban Institute.
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