I’ve been hearing a lot lately about the three main charity evaluation firms condemning the ratio of overhead to total expenses as a valid measure of nonprofit success. A joint letter released in June soundly condemned its general use as a guideline for donor evaluation and went on to justify its judgment.
In my experience as a NPO Board member and a financial and technology consultant to the nonprofit sector, the whole issue was pretty much a ‘no brainer’. Yes it is one thing you looked at, but has to be put in context of the type of organization. For example, for a public radio station a major portion of the budget is consumed by fund raising and administrative expenses just to stay on the air. Healthier fund raising translates to better programming. There may be some validity in a certain proportional relationship in comparisons to other public radio stations, but it is irrelevant when making comparisons with other charities.
I’ve also observed a lot of wasted time and energy exerted by NPO accounting staffs to maximize allocation of overhead to programs in pursuit of a better looking ratio using various allocation schemes that may be defensible but produce a meaningless result. With this pronouncement by the charitable giving guardians, hopefully we can expect some changes in this practice down the road.
Measuring nonprofit success requires more than looking at input and for that matter output measures. Richard Larkin, CPA, Technical Director for Nonprofit Accounting at BDO USA, LLP, in his review of the joint letter makes a strong case for shifting the focus on outcomes as the most real measures of success. Outcomes are more qualitative by nature and harder to define and measure. That is the challenge. Read Richard’s excellent article.