Make sense of charity overhead and program spending
Welcome. This is the podcast that helps you do good even better — regardless of which charities or causes you support.
This is Ed Long. In each podcast I talk about charities and provide actionable tips to help donors and volunteers to take their philanthropy to the next level and do good even better.
SeriousGivers and its websites depend on donations to keep going. Please donate now. Recently Michael from Sacramento, CA, generously kicked in to help cover the ongoing costs of providing this podcast and other SeriousGivers services. Thank you, Michael. View our latest supporters page.
Today’s sponsor is the number 13.
- We’re going to talk more about charity overhead today.
- And about concerns rightly raised that donors are focusing too much on operating percentages.
- Nearly 13% of reporting operating public charities reported spending nothing for management and general expenses, according to The Nonprofit Overhead Cost Study from The Bridgespan Group. Charity overhead is made up of management and general expenses, plus fundraising expenses.
- The point of reporting the 13% number is that overhead reporting can be imprecise and inaccurate. One of the reasons that donors are being urged to pay less attention to charity overhead numbers.
Main Topic: Make sense of charity overhead and program spending
This week three prominent charity data organizations renewed their urging that donors and charities not focus so heavily on charity overhead percentages. An “overhead percentage” is the flip side of a program spending percentage. What a charity doesn’t spend on programs, it spends on overhead. Overhead includes costs of administration and of fundraising.
At overheadmyth.com, this is how GuideStar, BBB Wise Giving Alliance and Charity Navigator summarized their renewed efforts:
In 2013, GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote an open letter to the donors of America in a campaign to end the Overhead Myth—the false conception that financial ratios are the sole indicator of nonprofit performance. For our second letter, released in October 2014, we invite the nonprofits of America to do their part to focus donors’ attention on what really matters: your organization’s efforts to make the world a better place. We ask nonprofits and the social sector at large to join us as we move toward an Overhead Solution.
I’ve written on program spending percentages, with the reminder that they are an indicator – just one indicator – but don’t provide the full picture of an organization. The following is from Podcast #21,
- What’s a charity program spending percentage?
- In its Form 990 or 990-EZ, a charity will report the amount it spends on programs and the total amount it spends. Its program spending percentage is calculated by dividing the amount spent on programs by the total amount spent and then (to get a percentage) multiplying the result by 100.
- For example: if an organization reports spending $750,000 on programs while spending a total of $1,000,000, dividing $750,000 by $1,000,000 produces the decimal number 0.75, and multiplying that by 100 produces the program spending percentage of 75%.
- Why calculate this percentage? The program spending percentage is an indicator of the focus and management approach of an organization.
- What’s an appropriate percentage? In SeriousGivers’ view,
- a percentage between 60% and 80% is appropriate (green zone),
- a percentage above 80% or below 60% (but not below 50%) might be reasonable in an organization’s specific circumstances, but should be discussed directly with and satisfactorily explained by the organization’s management before a donation is made (yellow zones), and
- a percentage below 50% (red zone) means the organization failed to meet our screening standard.
- What’s the concern with a program spending percentage above 80%? At times we’re asked why a program spending percentage above 80% should be discussed with the organization.
- If an organization reports spending more than 80% on programs, that means it is spending less than 20% on administration and fundraising. While an organization might be proud of minimizing administrative and fundraising costs, we believe that well-run organizations must spend meaningful resources on administration and fundraising.
- You also want to make sure that the organization is not
- having administrative or fundraising costs paid from an outside source or
- mis-categorizing administration or fundraising costs as program costs.
- How can you figure a program spending percentage in 3 minutes?
- It’s time for an 3-minute thrill.
- Start with a charity’s Form 990.
- Go to Part IX, the Statement of Functional Expenses.
- Divide the reported program spending total by the total expenses, and get the percentage by multiplying the result by 100.
- Watch me do it in the Charity Sherlock video.
Ice bucket challenge flood creates more challenges
According to press reports, the Ice Bucket Challenge has produced million in donations for the A.L.S. Association. The A.L.S. Association website at October 3 reports $115 million received since July 29.
The A.L.S. Association (EIN = 13-3271855) is a Washington, D.C. -based nonprofit that funds global research to find treatments and a cure for amyotrophic lateral sclerosis (ALS), commonly known as Lou Gehrig’s disease.
The generous response to the challenge has created a flood of donations. That flood creates more challenges, both for the A.L.S. Association and for donors.
- The A.L.S. Association now has in reserve 6.7 times the money it spent in its most recently reported year. In other words, it has almost 7 years worth of money. What will it do with the money?
- From a donor perspective, should you give more money to the A.L.S. Association for the time being? It has plenty of money now.
Perhaps the best approach, even for regular A.L.S. Association donors, is to wait and see how the organization handles the flood. See the A.L.S. Association’s most recent IRS Form 990, showing its finances and operations through January 2013. Adding $115 million to the reported numbers would mean that the A.L.S. Association has about $132.5 million in net assets compared to total expenses of $19.8 million (including $14.6 million of program expenses).
When I shared the above thoughts recently in a Serious Thoughts blog post, an unhappy community member (former community member) named Thelma didn’t like my approach on this topic and quickly wrote this to me:
Go to hell. Go straight to hell. Do not pass Go. Do not collect $200. And you certainly will not collect anything from me.Never contact me again.
Ouch. What do you think? Use the reply/comment box below.
This is the Doing Good Matters podcast first anniversary episode
Over the year we’ve talked a wide range of nonprofit and charity topics. We’ve even sliced some charity baloney. I’ve learned a lot along the way, and hope you have too.
When I think back over the year, I realize that the overriding theme of the Doing Good Matters podcast has been helping you and me get to the place where we can be rightfully proud about our giving to charity whether as a donor or a volunteer. That’s a theme I plan to continue as we move forward.
What is a podcast?
If you’ve listened to this podcast episode, you know what a podcast is. You’re ahead of the curve, with just about 5% of the listening audience having caught up. If you haven’t listened yet, just click the player arrow above just below the title of this post.
If you’ve ever wondered how to explain podcasting to a friend, feel free to steal some of the following.
- Podcasting is like internet radio, but better. It’s better because you can listen to
- what you want to,
- when you want,
- where you want to,
- without having a radio and
- without being connected to the internet.
- You can listen to a podcast at the gym, in your car, taking a walk, on the couch — you get to choose.
Podcasting does for radio and audio what the VCR did for television shows.
Individual podcasting shows are called podcasts.
Read more about podcasting — including links to favorite podcast sources.
Share your questions and feedback
I’d love to hear from you. I read every comment and email.
- Leave a voicemail at (424) 262-5280
- Use the reply / comment box below.
- Send me an email at ed[@]seriousgivers.org.
Listen each week, Subscribe
About Ed Long, the podcaster
Podcaster Ed Long has been preparing more than 40 years to do this podcast. He knows charities and the rules that apply to them. He’s analyzed charity finances and operations. He’s founded and run charities, and volunteered for them. He’s helped the public and law enforcement fight fake charities, and has served as a philanthropy educator and coach. Before all that he worked as a partner with a major Wall Street law firm. Ed is the founder and CEO of SeriousGivers, which itself is a charity. Ed knows the great work that strong charities can do with the resources entrusted to them, and is passionate about helping others find and support strong charities.