‘The Overhead Myth’ and Nonprofit Accounting

While many people may think that the primary role of accounting in the nonprofit arena is focused on balance sheets and fiscal oversight, recent conversations are shedding light on another important role accounting can play. As Dan Pallotta discusses in his recent TED Talk, The Way We Think About Charity is Dead Wrong, the intricate tie between fundraising, expenses and accounting factors greatly into how donors and grantors view nonprofit budgets.

Isn’t Less Nonprofit Overhead Better?

In specific, recent conversations have been sparked regarding nonprofit oversight and overhead expenses. Many groups have joined forces to challenge the long-held notion that “less overhead = better charity.” In truth, as Pallotta discusses, this mentality pushes nonprofit organizations to offer salaries, benefits and administrative accommodations that are well below what executives would receive in the corporate world. As a result, it’s nearly impossible for savvy professionals to want to work in the nonprofit sector, which ultimately results in brain drain.

What Can Accounting Do?

Accountants can play a pivotal role in moving the needle toward a more equal playing field in the way we track and report nonprofit expenses. Rather than downplaying costs associated with operating successful nonprofits, the accounting function can and should paint a more realistic picture. The more informed donors are about how much it actually costs to run a successful nonprofit, the more we can raise the bar and support nonprofits in operating on more than a shoestring budget.

 What Work is Already Being Done?

As part of this ongoing conversation, three of the nation’s leading philanthropic information sources – GuideStar, Charity Navigator, and BBB Wise Giving Alliance – wrote an open letter to America’s donors, tasking them to rethink the concept of overhead expenses. In it, they ask donors to “pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results.” The letter goes on to discuss the “Nonprofit Starvation Cycle” which drains nonprofit organizations of access to the quality leadership and resources they need to truly excel.

They also make the case for nonprofits to actually spend more money on overhead, arguing that “overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems— as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).” As a result they’ve started a website and a movement titled “The Overhead Myth” to help raise awareness and debunk this common misperception about nonprofit administrative expenses.

How Can I Help?

In a recent news release written by Guidestar, the company’s President and CEO, Jacob Harold, provides a number of ways constituents and nonprofits alike can support this cause. We’ve included those below in addition to others:

  • Visit OverheadMyth.com and download the open letter. This letter is being made available for open use and nonprofits can include it on their website, in donor solicitation communications, as well as marketing materials.
  • Share your nonprofit data via Guidestar.org. Guidestar’s website provides an open channel for donors to access information about nonprofit financials. The more donors see and understand what it takes for a nonprofit to function successfully, the better we’ll be able to raise the bar for overhead expenses.
  • Watch Dan Pallotta’s TED Talk, The Way We Think About Charity is Dead Wrong, and share with your friends and colleagues via your social networks. Pallotta’s talk helps make the case for rethinking nonprofit expenses, the charity lifecycle and the role of accounting.
  • Donors can also help spread the word using The Overhead Myth’s communications and social media toolkit, which provides sample tweets, Facebook and Google+ posts, and newsletter emails and articles.

For more information on how your nonprofit can improve its accounting reporting functions to help turn the tides of “The Overhead Myth,” contact ESP. We’d be happy to consult with you regarding your nonprofits reports and overhead.