Filed under: Advisory

February 26, 2015

By Cheryl Olson, CPA, CGMA

You’ve all heard of the Overhead Myth, which is the “false conception that financial ratios are the sole indicator of nonprofit performance.”  In 2013, GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote a letter recommending donors look at other performance factors beyond the administrative and fundraising expense ratios. The three watchdog groups then released a second letter in the fall, inviting nonprofit organizations to take an active role in helping donors understand other measures in the following three ways:

  • First, demonstrate ethical practice and share performance data.
  • Second, manage towards results and understand true costs.
  • Third, help educate funders (individuals, foundations, corporations, and government) on the real cost of results.

To download the outreach toolkit and other tools and resources to help nonprofits move beyond the Overhead Myth and towards the Overhead Solution, click here.

While the media love reporting on fraud and excessive waste at charities, that’s the exception, not the rule. Yes, effective organizations spend money on overhead; they just need to be able to articulate the value and return on that investment. This includes allocating resources for financial management, oversight, compliance, staffing, governance, etc.

In regards to mission and program, organizations must be able to articulate their impact.  If you are having trouble measuring impact, then a donor may wonder how to determine if you are doing any good at all.  Review your mission and determine what you will measure in order to evaluate if you’re successfully accomplishing your mission.  Is it a disease that is cured or maybe reducing the number of people that get an ailment?  The best success measure is to calculate the cost per unit of success (such as number of people cured or number of people who didn’t get a particular disease) by dividing the total number of successes by the total cost.  The cost effectiveness can then be compared to other similar organizations as a measure of efficiency.

And though numbers are important, don’t forget that people learn in different ways. Your organization will need to tell your story through a combination of numbers, compelling narrative, and graphics such as pictures, photos, tables and other visuals. Absent to telling your story and sharing your impact, grantmakers, donors and watchdog groups will continue to look at your ratios until other measures are created, since that information is readily available. So, be sure you are reporting expenses in the proper category between administration, fundraising, and program and be able to explain the not only the rationale but the results.

For effective stewardship, organizations must invest in building their organizational infrastructure, staffing, and systems to support the growth, and improve oversight and monitoring. Then organizations must accurately record and report on the true cost of operations.

To financially support this investment, foundations can look beyond the ratios and get a better understanding of how the organization is operating. Here are some questions a grantmaker could ask:

  • Is there a strategic plan?
  • What are the operational measures of success?
  • Have they established measures of financial and operational success beyond meeting or exceeding the budget? Remember, what gets measured, gets done.
  • Have programs been analyzed from both a financial and mission perspective?
  • Do the annual work plan/operational goals support the strategy?
  • Is the operating budget the financial interpretation of the work plan?
  • Are staff performance goals linked to the plan?
  • How does the strategy, work plan, budget and staff performance get monitored and are they effective and efficient?
  • Have appropriate milestones been defined to keep focused, which also give an opportunity to evaluate and react?
  • Have ratios and benchmarks from comparable organizations been obtained?
  • Are decisions for staffing, effective systems, internal controls, governance practices and compliance with laws and regulations intentional?
  • Has a risk assessment been done to know where they are most vulnerable?
  • Are they consistent in their internal and external numbers between the audited financial statements, IRS Form 990, annual report, website, fund development reports and solicitations, etc.?
  • If they receive federal funds directly or indirectly through sub-agreements with state and local governments, are they aware of the impact of The Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards new rules that took effect on 12/26/14?

 

Article first published in “Philanthropy Post” in January 2015, a newsletter of the Grantmakers of Oregon and Southwest Washington. 

© Clark Nuber PS, 2015.  All Rights Reserved

 

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.