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From starvation to celebration: 5 ways your charity can help change the overhead conversation

From starvation to celebration: 5 ways your charity can help change the overhead conversation

Overhead is the most used criteria for judging a charity for donations but it is also one of the worst ways of judging a charity

A 2013 Muttart Foundation survey revealed that nearly three-quarters of Canadians believe that charities spend too much on salaries and administration.

It’s concerning to think one third of Canadians believe no money should be spent on administration given the evidence that spending too little on infrastructure can actually be counter-productive to achieving mission (let alone spending none). At Imagine Canada, we believe that achieving real impact requires real investment.

Not only is the focus on overhead counter-productive to achieving impact, it’s also surprisingly difficult to evaluate organizations based on their balance sheets alone. If you were presented with a list of all the teachers in a school and the amount of money they spent on their classrooms, would you assume the teacher who had spent the least was the best?

Of course not; you would rightly want additional information such as how well the students did on tests, how many graduated, etc. Similarly, it’s difficult to evaluate charities and nonprofits without additional contextual information.

The good news is that the tide is changing. Enlightened donors and grantmakers are focusing more on outcomes and impact. They are recognizing that administrative costs are essential for impact to achieved, and that expenses have nothing to do with how well an organization is run. 

So what you can do to help the overhead conversation continue to evolve? Here are 5 simple strategies that you can start working on right now at your organization. 

1. Help your donors to look beyond expense ratios

Even when you have an overhead ratio that is remarkably low, focusing primarily on this ratio as a measure of success can be a short sighted tactic. Let’s say your organization focuses on at-risk youth. What if your agency discovers that one of its programs is only helping a small percentage of youth and as a result decides to abandon that initiative in favour of one that, although more expensive, has produced better results? Will you lose donors after they see a marked difference in your overhead ratio next year?

Instead of solely focusing on ratios, provide your donors with different types of evidence of your organization’s effectiveness and credibility. Not only will this encourage your stakeholders to expect other measures – thereby allowing your organization the flexibility to pursue the programming with the best impact – but it will make your fundraising efforts stronger. It seems that Canadian donors are looking for more details about the organizations they support, which is a positive development. Bolster your brand by providing multiple types of evidence for your effectiveness and credibility, such as annual reports with financial statements, biographies and messages from your leadership, media highlights, and impact reports. 

2. Celebrate your impact

Although measuring your impact can feel like a chore, the benefits of identifying and communicating your impact are well worth it. One of the biggest changes in philanthropy in recent years has been the increased focus on demonstrating impact. Philanthropists want the greatest return on their donated dollar. The expense breakdown and administrative ratio for a donated dollar may carry much less weight when you can demonstrate the end impact that each donated dollar actually has.

Take for example three organizations that focus on reducing criminal re-offense rates. Organization A spends 30% of every dollar on administrative expenses, organization B spends 10%, and organization C spends 15%. However, the program at organization A is shown to reduce criminal recidivism rates 14%, while the program at organization B reduces recidivism rates by 2%, and organization C doesn’t know the effectiveness of their program. Which program do you think would be most attractive to a grantmaker? (Organization A – despite the high expense ratio!).  

3. Build the change you want to see in Canada, first within your organization

While charitable organizations are trusted and are lucky to have such generous support from Canadians, we know we can always do a better job explaining our role and contributions to society. Encourage a staff culture at your organization that appreciates and communicates the importance of long-term investment in the charitable sector. 

At Imagine Canada we have been working in partnership with others to encourage encourage this change: a focus on outcomes and impact, not expenses. Earlier this year we were excited to release The State of Evaluation, a comprehensive look at how Canadian charities are measuring and evaluating their work, and how they are talking with their donors about evaluation metrics. The study reveals the common enablers and barriers to evaluation and shows how you "measure up" with your nonprofit peers.

4. By default, write administrative costs into your funding proposals

It can be tempting to downplay your overhead expenses when writing a grant application. After all, you could be competing against hundreds of other proposals. However, as we’ve described in our previous post on budget writing, this can lead to negative consequences. 

For example, some of the overhead expenses you may have at your organization are legal and accounting fees, utilities, office space, and insurance. Including a percentage of these in your grant budget allows the project to bear some of the organization’s day-to-day operating costs. In truth, without these expenses, your organization couldn't run at all and the project described in your proposal wouldn’t be able to go forward.

Remember that many funders have an exceptional grasp of realistic expenses, having reviewed hundreds of budgets before looking at yours. Excluding any costs from your budget – including overhead – could make your project seem unachievable and may lead to rejection.

A simple option for the inclusion of overhead is to list it as a percentage of the total budget (e.g., 15%) and as a unique budget line. A word of caution: don't forget to tailor your approach to the guidelines of each funder. Many will have an allowed percentage for overhead and a few, albeit rare, do not allow for it at all.

5. Don’t assume everyone has the same expectation — or definition — of overhead

Once you know one donor, you know one donor. What each assumes is a reasonable amount for you to spend on overhead — and their definition of what overhead or administrative includes — varies.

When it comes to large funding bodies, many have very detailed policies on what can and cannot be included in a proposal, and your budget should be tailored accordingly. For example, Ontario Trillium Foundation (OTF) has said they will fund overhead and administrative costs to a maximum of 15% of the total grant budget. Their policy also provides helpful definitions of eligible overhead/administrative costs. Be sure to do your homework before submitting an application. You may actually be pleasantly surprised to learn that a number of administrative costs can be included in your project grant.

To help with your fundraising research, use Grant Connect to save time and find the right prospects for your cause.

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