Last week, I got an email from a company I love and respect. They are fundraising to help those affected by the cyclone in Myanmar, which is great. They chose GlobalGiving as a fundraising partner, and the email I received assured me that the GlobalGiving "offers us donors a money-back guarantee that our money will go to helping people via specific projects, not paying for administrative overhead."

Wow.

You may be thinking "wow" as well, but your wow is probably about the idea of a satisfaction guarantee for donations. (The guarantee in question doesn't actually state that no funds will be used for overhead, but I guess that's what the email's author would view as satisfactory.)

My "wow" is about the notion that nonprofit organizations can help people without needing any money for administrative expenses.

What does "administrative overhead" really mean?

Most nonprofits, like any other organization, need phones. Two tin cans with a string attached just don't cut it for communications. What other items in a nonprofit's budget count as administrative overhead? Often, it's things like employee salaries, rent, utilities, office supplies, bookkeeping, vehicles, and gasoline - people and supplies without which any aid to cyclone victims would have an awfully hard time getting to them or being accounted for afterwards. Some of these items can be partially allocated to the programs they're being used for, but there are certain items that are just generally necessary to keep the organization up and running.

Who can afford to work for a nonprofit?

A recent blog post called If the work of nonprofits is so valuable, why are nonprofit workers so undervalued? summed it up nicely, focusing on salaries:

Have you ever earmarked a donation, requesting that it be spent on programs and not administration? Have you ever rated a charity based solely on what percentage of its funds go to overhead?

Many people do, thinking they're "savvy" donors... A construction manager's salary and health insurance, his/her skills and his/her passion for building Habitat homes are worthwhile expenditures. A Habitat home is not just volunteers, 2x4s, paint and nails; it's made possible by a staff member who wrangles the hundreds of volunteers, the fundraiser who gets sponsors for the supplies, the grantwriter who dots every i and crosses every t. [...]

They accept never earning what commercial carpenters or graphic designers can and do earn. But continually chipping away at nonprofits' overhead and administration costs, assuming those costs are unnecessary or wasteful without any basis, becomes a form of punishment. How much can you strip away from a nonprofit's employees before they burn out?

The discussion in the comments reveals yet another issue. When an organization can't offer its employees a living wage, it's more likely that only people from affluent backgrounds can afford to stay employed there for long periods of time. In the case of nonprofits who work in low income communities, this may mean that people from the community can't afford to stay in a job at that nonprofit - even though they may have the best knowledge of the issues in their community and the most need for a job.

Why is "overhead" such a dirty word?

First, we're low on trust. Every time a nonprofit executive hits the papers because they've embezzled from the organization, and we see that they were earning six figures to boot, we lose a little faith in "do gooders." Every time our mailbox holds yet another fundraising letter from a nonprofit full of address labels and we think "Doesn't it cost money to keep sending me this junk?" we suspect waste. Kate Barr at Balancing the Mission Checkbook points out that donors have to trust a nonprofit to feel good about making unrestricted donations.

Second, donors reach out beyond their own communities, and as a consequence we don't know much about many of the causes and organizations we support. How would I have any idea what it takes to help people who have survived a cyclone? About the logistical challenges it takes to get the help to them, or how much it costs? I don't have any way to know which organization is doing a good job, because I couldn't do it if I tried. However, I still want to help, and I want my help to make a difference.

Third, it can be difficult to measure the effectiveness of a nonprofit. Since they don't often sell their services, we can't rely on the marketplace and profit/loss numbers to assess how they're doing. So we turn to numbers like percentage of funds spent on "overhead" versus programs, or how much of each fundraised dollar is spent on something other than fundraising more dollars. Jeff Brooks at the Donor Power blog says that the most popular charity rating sites, GuideStar and Charity Navigator, use financial "efficiency" data as a key indicator, even though that doesn't necessarily measure effectiveness.

As Alan Strand of Nonprofit Accounting Bootcamp said in a comment:

[...] if an organization found a cure for cancer, AIDS, or whatever, would we really care if their admin percentage was 45%? “Whoa, better not donate to them. They don’t manage their money well!”

When donors earmark gifts away from administrative expenses and general operating support, it can actually keep a nonprofit from being more effective. The American Red Cross had problems with donations after 9/11, says the New York Times in Here's My Check, Spend It All At Once, because donors wouldn't accept that the organization needed to purchase equipment and other upgrades so it could respond better to future crises.

Donors should remember that several other items are administrative overhead:

• Compliance with laws and regulations about financial management
• Evaluation of programs and services
• Communication with donors

These expenses are crucial to accountability and effectiveness.

How do you know if a nonprofit is effective?

A high proportion of costs spent on administrative overhead may indeed be a signal that the organization isn't that efficient. Maybe they shop at Macy's instead of Costco. Maybe they pay their people more than they need to. Maybe they're weak on getting donations from local businesses to help with logo design, printing flyers, and pro bono accounting services.

So what's a donor to do? Charity Navigator evaluates charities based on financial information because it's important, but also because it's available in a standard format that allows comparisons between nonprofits. However, they encourage donors to go beyond this snapshot. In 6 Questions To Ask Charities Before Donating, they suggest that you ask the nonprofit about its goals and how it measures its progress. Do the goals seem reasonable? Does their measurement plan make sense to you? Are they meeting their goals?

Find out how much they think it costs to deliver services, whether those services are meals or legal representation or something even less tangible. Does that seem like a reasonable amount of money to spend on that service?

If this level of data collection seems overwhelming because you give to a number of organizations, consider paring it down to a few and learning more about them.

How do YOU decide who gets your money?

How do you decide what nonprofits you donate to? How do you know whether they're effective?

[Image by Per Hardestam.]