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Impact vs. Overhead

Resource Center - Foundation

Talk to almost any donor about what’s important when they give, and the answer will be impact, change and positive outcomes. Donors want to know that they’re making a difference—that with their chosen charity, they’re making real change.

It could be how many people are taught to read, or how many acres of wetlands are saved. There are any number of ways that charity’s outcomes can be shown.

You can be certain, though, that impact will NEVER be successfully demonstrated by fundraising and overhead cost ratios. Fundraising and administrative expenses are not a guide to effectiveness, performance and impact, yet they have been the key measures that supporters have been encouraged to use for years.

That’s why the recent open letter written by Guidestar, Charity Navigator and the BBB Wise Giving Alliance denouncing the “overhead ratio” as a valid indicator of nonprofit performance is so important. It’s one thing for charities and fundraisers to make the case against linking ratios and effectiveness. But we are not used to hearing these three organizations putting forward that same line, and even pro-actively decrying the “Overhead Myth.”

In their letter, the three organizations highlight the “Overhead Myth” as a self-defeating process which keeps nonprofits focused on holding down costs instead of investing in infrastructure, processes, administration, fundraising and support that can help them be more effective and fulfill their missions.

This is a critical shift in approach that affects all of us. Effective philanthropy is supported by knowledgeable and educated donors. Charities should approach supporters as equal partners and engage them, talking straightforwardly about opportunities and challenges.

But the focus on overhead cost ratios “dumbs down” the charity-donor relationship and destroys those conversations. It casts fundraising in a very negative light—as something that should always be cut back—when fundraising is an essential element of philanthropy that moves and inspires people to action.

That’s why AFP has worked ceaselessly over the years to educate the media, the government and the public about the role of fundraising and what donors truly want: impact.

In Canada, AFP was a significant leader in the push to help the Canada Revenue Agency’s focus during the development of its fundraising guidance regulations. Based upon sector input, the CRA focused the guidance on the impact and missions of charities and nonprofits and the myriad of factors that make each organization unique instead of a one-size-fits-all cost-ratio regime.

And that’s where our conversations, and the “Overhead Myth” Campaign, should lead: an emphasis on impact and change, not cost ratios. We should be encouraging open conversations, engagement and partnerships, not reliance on a mathematical formula that doesn’t have any relationship to the outcomes of our sector.

It’s what donors want, and it’s how philanthropy is most effective.

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