Jennifer BrandeberryPUBAFRS 314012/15/14The Overhead MythHistorically, financial ratios have been used as a quick and easy way to measure a nonprofits performance and success. More specifically, an overhead ratio is used as an indicator to measure how much money an organization spends on overhead costs versus money spent on their mission (Jarvis). These ratios are helpful but can cause a few challenges for nonprofit organizations when people rely solely on the ratios to rate a nonprofit. Many people, even people who work at nonprofit organizations, have common misconceptions about what makes a good nonprofit. More specifically, many people equate a nonprofit organization with low overhead to running efficiently and an organization with high overhead to running poorly. Sometimes this is a correct assumption but many times the assumption is false and more research needs to be completed. Relying solely on financial ratios to judge a nonprofit organization can lead to what many people are now calling the overhead myth. The overhead myth is the false conception that financial ratios are the sole indicator of a nonprofits performance (The Overhead Myth).Overhead costs for nonprofit organizations include expenses not related directly to programs and services. Such expenses include employee salaries, rent, utilities, and administrative costs. Some donors and outside viewers criticize nonprofits with high overhead costs. Donors are less likely to donate if they believe their money is going towards administrative expenses and not directly towards programs. Currently, nonprofits seem to be rewarded for how little they spend instead of how much they are accomplishing (Pallotta). Certain watchdog groups believe overhead costs should only account for as little as 25% of total expenditures (Jarvis). These beliefs can cause some stakeholders and possible stakeholders to put too much emphasis on how on organization rates based on their financial ratios. It is important to focus on other metrics such as transparency, leadership, governance and results to accurately judge a nonprofit organization (TheOverheadMyth). GuideStar, BBB Wise Giving Alliance, and Charity Navigator have joined together to try and end the overhead myth. All three organizations run websites that evaluate nonprofit organizations. Currently, their goal is to raise awareness that focusing too heavily on overhead without considering other metrics does more harm than good (TheOverheadMyth). Quite a few problems arise for a nonprofit organization and the sector as a whole when stakeholders only consider overhead expenses to total expenses. It is GuideStars, BBB Wise Giving Alliance, and Charity Navigators goal for donors to begin considering the whole picture before making charitable contributions (TheOverheadMyth). One problem that arises, due to the overhead myth, is many nonprofits feel forced to lower overhead expenses as much as they can. Lowering required expenses can cause an underinvestment in core costs which can lead to limited results. This is referred to as the nonprofit starvation cycle. Due to continuous effort to keep overhead expenses down, nonprofit organizations become starved for decent infrastructure (Gregory and Howard). The campaign notes the overhead myth is so widespread that even founders have misconceptions about how much it costs to run a nonprofit. This can lead to staff feeling pressure from even the nonprofits founder to keep overhead costs down (Jarvis). Limiting overhead can cause an organization to lack resources and bring in too little money. Now the organization is unable to increase or even sustain impact. Gregory and Howard also mention in their article, The Nonprofit Starvation Cycle, that due to increased pressure to keep overhead costs down, some organizations could have misleading reporting. Another problem that arises and affects the sector as a whole is many highly qualified people are less likely to apply for a nonprofit position because they will likely not be getting paid as much as they would in the for-profit sector. This is due to nonprofit organizations trying to spend little on administrative costs. Many people choose to work for a for-profit company, get paid more, and just donate to a nonprofit organization instead (Pallotta). Recruiting, developing, and retaining top performers is essential for all organizations though, whether for-profit or nonprofit. In Forces for Good: The Six Practices of High-Impact Nonprofits, by Leslie R. Crutchfield and Heather McLeod Grant, twelve organizations were studied that they believed to be high impact. Each high impact organization cited their staff as a critical success factor. Although leaders do not join nonprofit organizations for the salary, it is important to provide an adequate salary, especially for employees raising a family. Ten out of the twelve organization discussed in Forces For Good aim to pay employees at the higher end of the nonprofit compensation scale (Crutchfield and Grant, 211-212). The challenge is now how do organizations in the nonprofit sector change these misconceptions so they can start focusing more on results and less on costs.Raising awareness is the first step to conquering the overhead myth. Dan Pallottas TED talk titled The way we think about charity is dead wrong accelerated the conversation. The topic began to circulate within the nonprofit sector which helped start The Overhead Myth Campaign. More and more nonprofit organizations are becoming aware of the overhead myth and now it is time to spread the message even farther. A strategic plan needs to be created by nonprofit organizations to help spread the message to their donors. Then reaching out to the overall public to build awareness is critical. With social media, even just one person complaining about an organization can turn into millions of shares or likes. It is important to educate everyone on the benefits of donating money to help support operating costs. The nonprofit sector should also consider how to reach out and present information regarding the overhead myth. With each stakeholder, the focus of the conversation might be different but it is also important to provide all the information. Nonprofit organizations will now need to be much more transparent and provide quality information. Nonprofit organizations will now need to not only provide financial information but also provide information on how impactful their organizations are and how larger operating expenses increases impact. This is an educational exercise for the nonprofit organization, stakeholders, and the public to gain a better understanding of how much of an impact the organization has made relative to their costs. A charity might have large expenses but achieve great results compared to a charity with low expenses (Pallotta). This can create less confusion among donors and can build stronger relationships.With more of a focus on results, nonprofit organizations will need to invest in performance management systems (TheOverheadMyth). Developing and maintaining quality data systems is critical if nonprofit organizations are to provide their stakeholders with the best information. Locating true costs that achieve results is necessary if people are to believe that higher overhead costs are not always a negative sign. These true costs need to be understood and managed effectively (The Overhead Myth). With less of an emphasis on costs and more of an emphasis on results, nonprofit organizations might be able to attract more highly qualified employees. Higher compensation could be offered to employees once the public begins to understand that low costs are not always better in nonprofits. Larger salaries could increase competition for positions. Larger salaries could also help lower the turnover rates if people feel they are being more adequately compensated for their services. With highly qualified employees that stay within an organization longer, the organization could run more efficiently and effectively. These employees could hopefully help the organization sustain and achieve impact. These statements are all assumptions but these assumptions seem to be correct when it comes to most for-profit businesses. More and more nonprofits are seeing the benefits of running their organization more like a business. The products are the services and programs nonprofits provide. In order to achieve great impact, nonprofits can look to businesses who have achieved great results for guidance. In Jim Collins book Good to Great and the Social Sectors, Collins states it is not good enough for nonprofits to become more like businesses. Nonprofits should want to become more like a great business. Collins lists five issues and one directly relates back to the overhead myth. Collin believes in the social sector, money is only an input and not a measure of greatness (Collins, 5). Performance should not be assessed based on financial results but based on how much the mission is fulfilled. The business thinking is present but the metrics have changed. The Overhead Myth Campaign has supporters but has also received some opposition. For example, CharityWatch maintains that overhead ratios are a good, unbiased way to judge a nonprofits effectiveness. There are concerns that receiving quality unbiased information regarding program effectiveness will be difficult to obtain. Another concern is it could be difficult to compare different charities based on different program outcome measurements. Each nonprofit organization could measure impact in different ways. These are all valid arguments that need to be considered. Understanding all positions is important to making a quality and informed decision. Overall, I agree with The Overhead Myth Campaign. Nonprofits, stakeholders, and the public need to become aware that low overhead costs are not always a sign of a healthy nonprofit. Raising awareness that people need to consider other metrics before making a decision is very important for the health of nonprofit organizations. Nonprofit organizations are faced with a few problems due to the misconception surrounding overhead expenses. After reducing the overhead myth a lot of opportunities arise due to the campaign but with those opportunities also come challenges.

Works CitedPallotta, Dan. The way we think about charity is dead wrong. Online video. TedTalks. March 2013. The Overhead Myth. GuideStar, BBB Wise Giving Alliance, and Charity Navigator, 2013. Web.14 Dec. 2014.Crutchfield, Leslie R., and Heather McLeod Grant. Forces for Good: The Six Practices of High-impact Nonprofits. San Francisco: Jossey-Bass, 2012. Print.Jarvis, Abby. "The Overhead Myth: Whats All The Fuss About?" QGiv. 25 June 2013. Web. 14Dec. 2014.N.a. "Overhead Ratios are Essential for Informed Giving." CharityWatch. July 2013. Web. 14Dec. 2014.Collins, James C. Good to Great and the Social Sectors: Why Business Thinking Is Not thethe Answer: A Monograph to Accompany Good to Great. Boulder, Colo. J. Collins, 2005. Print.Gregory, Ann G. and Don Howard. The Nonprofit Starvation Cycle. SSIreview. Fall 2009.Web. 13 Dec. 2014.