Wednesday, June 19, 2013

AHA! - It costs money to run a nonprofit.

GuideStar, Charity Navigator, and the BBB Wise Giving Alliance recently put out a letter cautioning donors against placing too much emphasis on artificially low administrative costs. It seems that they finally recognized that ranking the effectiveness of nonprofits by how little they spend to keep their business operations running might be harmful to the health of nonprofits.

The problem is, they have spent many years carefully and repetitively convincing  (dare I say brainwashing?) donors that there was some magic percentage that nonprofits should not exceed for administrative costs. It might be just about too late for these revered ranking organizations to have their "AHA" moment.

The truth is, just like any other business, nonprofits have to have a certain amount of money to keep their operations going, and that number, or more properly the ratio of administrative (overhead) to program costs, is going to differ according to the operational needs.

Nonprofits with  large staffing requirements, expensive equipment like trucks or warehouse racking or who require large buildings  to house and distribute goods are going to spend a higher ratio of their funds to maintain those than a nonprofit that runs a say, a suicide hotline in the basement of someone's home. Both should be equally evaluated for funding according to how effectively they accomplish their mission.

Very few businesses can operate efficiently and effectively and still keep overhead below 35%. All the ranking organizations accomplish by encouraging reporting of those expenses at 10 or 20% of revenue is to encourage creative bookkeeping. The result is that many good, useful and effective nonprofits go under because they simply don't have the infrastructure to maintain the organization at even minimum operating efficiency.

Another truly irritating metric that is often evaluated is whether key staff salaries are "too high". Too high compared to what?  It is undeniably true that some charitable organizations are simply a way for the founders and their cronies to get paid an exorbitant amount of money. But to say that the CEO of a nonprofit with 100 million dollars in revenue is overpaid just because of the dollar amount of their salary is ludicrous. If the CEO of a comparably sized for-profit is making $500K a year, why should the CEO of the nonprofit be expected to make a third of that figure?

If the salaries of nonprofit key staff are considered as a part of the whole, they often make in the aggregate less than 3% of the total revenue figure. Try hiring a competent CEO, CFO and COO for a for-profit and stay at that level. The turnover and retraining costs at nonprofits are the subject of much hand-wringing. Perhaps if the staff was compensated at levels comparable to for-profit industry standards and evaluated based on results instead of cost, that wouldn't be such a problem.

No one is advocating that nonprofits should spend the bulk of their donations and financial donor support on overhead. That's as ridiculous as spending too little. There is a point where overhead, including fund raising costs do exceed an acceptable level when compared to results.  But starving any operation of reasonable operating capital is a sure way to put it out of business, and far too many nonprofits are facing that reality every day.

I'm ecstatic that these three organizations have finally recognized that their effectiveness measurement metric is flawed.  Hopefully they can apply some common sense to their operations and provide better donor guidance reporting in the future.

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