Mailbag: Forget the Overhead Myth

Q: I know that donors are looking at my administrative costs, and that I'm supposed to keep my overhead low if I want to get good evaluations from watchdog groups...but what does that actually mean?  I can't cut anything else without cutting staff, so...are other people just way better at creative accounting?

A: Yes, there are some donors who are looking at your administrative expenses, popping it over your whole budget and rejecting folks whose ratio doesn't match their ideals.  YOU DON'T NEED THEM. Also, they're really really few and far between.  Asking you about your overhead is a good thing - it keeps us honest, it keeps us mindful of a need to answer to our supporters, to be efficient.  But that's the start of a conversation for most donors, as it should be.  That's not a bad thing at all.

There is, certainly, a big drive in the sector, for accountability and efficiency.  And overhead seems like a good way to measure that.  So let's be kind and say that this is a case of a little knowledge being a dangerous thing - there are donors who've read this far in their official donor orientation handbook and ran out of time, and are now just winging it.  You run into them in the field, and you hear about them in the nonprofit press...and they make a good scary story to tell around the nonprofit campfire, because like all good scary stories, there's enough truth there to make the story seem very very real.

First, head here, to one of my favorite web comics, Savage Chicken.  Have a chuckle, then come right back.

Now, let's talk.

1) How's your overhead?  Are you doing things that make sense?  When you spend money, do you do so intentionally, with reasons you can articulate and stand behind?  How does your board feel about your expenses (overhead and beyond)?

That's right - I'm not asking you about your overhead in comparison to anything - not in ratio with your overall budget, not in comparison to an average for your type of organization, and certainly not by asking how close you can get to zero.  I'm asking why you spend what you do, and why you think that's the right move for your organization and the people you serve.

If you can tell that story, most donors will listen.  ASKING QUESTIONS IS NOT A BAD THING.  Donors should be asking questions, and this is a question that you can expect, so swing for the fences.  You're going to be asked to talk about why you need money, and how much you can do with it!  That's a great place to go in a conversation, and these questions means that the donor is driving you there.  Again - this is fantastic.  A gift, really.

2) Now that I've asked you to tell me a story about what you spend and why, without feeling persecuted by expectations of your overhead, please remember to tell that story to anyone who will listen.  But, of course, it would be stupid not to be prepared to discuss how that number, whatever it is, compares to other numbers in the mind of your prospective donor.

• What's typical overhead for an organization in your field?  How do you compare?  Explain any big differences...could be that you're operating in Nebraska and most are in New York City.  Could be that you're running these two pilot programs that require extra oversight and evaluation.  Could be that you have a commitment to covering full health benefits for all your employees.  
• What's your overhead to program ratio? The question at hand, however you want to break it down: what's the "running the organization" vs. "performing our mission" set of numbers?  And when you think of it like that, you may start to see that a simple ratio from your budget or balance sheet doesn't really describe that accurately.  Say, for example, that you put all your staff in the administrative line...but there are only two of you, and in addition to running the organization, you and your second in command also provide direct services to clients.  So...are you "overhead" or are you "program?"  You don't even need to decide how to categorize yourself - you just need to be able to explain why the numbers themselves need context.
• What other numbers (straight from your financial statements or in comparison to any benchmarks) will draw questions?  Be prepared for questions you can reasonably expect.
• There's no end to the list - but the same rules apply: As long as you can explain your reasons for the way you stack up in various comparisons, being clear and open about your institutional choices is GREAT.  It may help you and some donors see, early on, that you're just not a good fit for each other.  You want - NEED - to let them go.  They'll be dissatisfied with their donations, and you'll drive yourself crazy trying to please them.  

3) Your comment about creative accounting scares the bejesus out of me.  Creative accounting shouldn't be a euphemism, it should be a term of praise for the folks who have figured out how to use the very clear and straightforward rules of GAAP (Generally Accepted Accounting Practice) to sing nuanced and complex melodies.  Don't ever attempt any kind of deception through your financial statements!  (First of all, it's one of the stupidest things you can do; it's bad form and bad faith, and you can't make up for that by pretending it's justified to help you achieve your mission.  You have to live with your realities, and they are reflected in your numbers.  Second, you'll get caught.  You will.  And that could, perhaps should, destroy your organization, in a shuttering/closing to business/not-existing-anymore sort of way. Don't do it.)

• You should be discussing options with your accountant so that your numbers are "singing" your song.  
• You should be running your basic financial statements by trusted business savvy advisors, for the express purpose of having them tell you what they see in them, what questions they have after reviewing them, etc. (Then you prepare to answer those questions straightforward and with confidence; see above.)
• You should prepare development versions of all your financial statements that attractively lay out all the context and assumptions that folks should find relevant in looking over those numbers.
• IF YOU ARE HOPING TO HIDE anything that you find embarrassing in those numbers, the problem isn't the numbers.  The problem is the embarrassing reality.  So you either need to find a way to confess a one time lapse (you screwed up cash flow your first year on the job and needed to make a withdrawal from savings to make payroll for a couple of months) or change the way you do business so that your practices reflect what you want to tell people you do.  See how that works?

Social Entrepreneurship: Why you can't ignore this buzzword

Echoing Green, along with the Columbia School of International and Public Affairs, put out an interesting report (preliminary, they note) in June of this year titled Early Stage Impact Investing: A Blueprint for Screening Social Impact Potential.

Why you should care:

1. Maybe some of you consider yourselves social entrepreneurs.  You're seeking funding, but whether or not you're building up a tax-exempt nonprofit organization, you identify primarily as an entrepreneur and you're thinking in terms of investors instead of donors.
2. If you don't identify that way, you still don't have the luxury of ignoring that perspective.  Venture Philanthropy as a concept is not going anywhere in the near future, and in my experience it's not only growing as a philanthropist mindset, it's a good thing for the sector as a whole.  You need to be able to make a case for your organization and projects in terms of social investment, with calculable returns and impact.

This report, among other things, does an excellent job of highlighting seven elements that "investors should probe in order to mitigate impact risk and increase the potential for an investment to achieve its social targets."  When you cut through the jargon, you've got yourself a nice list of seven items you want to address (or be able to address in further conversation) any time you are putting together a grant or proposal for someone who identifies as a venture philanthropist or has been indoctrinated into the sector fad of "accountability."

• Social mission: how do you demonstrate your commitment to your mission? This all boils down to that thing your grade school (high school?) writing teachers kept telling you: show, don't tell.  "We're committed to fighting illiteracy" is not as expressive as "we have tutored 10,000 students this year, and all of them now test at grade level in reading comprehension."  (Wouldn't that be amazing?)
• Evidence: Can you prove causality?  How does a donor know that your program directly caused the changes (outcomes) and that those changes have an impact for society?  (Maybe all those thousands of kids were going to test at grade level, or their teachers are really good and it's not the tutoring that helped them.)
• Social entrepreneur: Just like investing in businesses, the leadership matters.  A great idea won't make it if the organization's director is bad at their job...so inspiring confidence in the leadership team is essential.
• Impact measurement: How are you evaluating your work? (There's no one right answer, as long as you're doing it in a sustainable and sensible way, and can communicate to the donor what kind of reports and measurements they should expect to see in the future.)
• Potential for disruptive innovation: What makes you unique?  Why should a donor give to you, instead of one of the gazillion other organizations trying to solve the same problem/provide the same services?  
• Potential for scale: This is mostly applicable to smaller organizations, but the general question is "if you succeed, can you change the world?"  When you're looking at investments, you want to know if you're investing in a very nice little coffee shop that will serve its neighborhood well, or if you're investing in Starbucks.  Most investors salivate over the latter more than the former, but you have to be honest about what you are and hope to be.
• Governance: This is a different aspect of leadership, and importantly distinct.  But making it clear that this yours is a well governed (and not just well helmed) organization is good for addressing everything from paranoia (how do I know you won't misuse my funds) to agility (if "market conditions" change dramatically tomorrow, will you have the adaptability to change with them?  Think about March of Dimes, which started to combat polio in children...but still exists, despite the near eradication of that disease, thanks to good governance.)

Quick Tips: Learn How to Give from the Buffetts

Talk about a sincere and thoughtful philanthropist: Warren Buffett.  Oh, wait...we're not talking about him, even though he's a bit more famous than his older sister, Doris.

Doris Buffett and her grandson, Alex Rozek have been interested in making more people into philanthropists - people who are not just charitable with their money, but think strategically about how to support the causes and organizations they care about the most. [Aside: the development shrink has chosen not to be the grammarian stickler - but there's a part of me screaming to correct the above sentence to "...about which they care the most."  But it just doesn't sound good, even if it's proper.  Forgive me!]

Anyway, Doris and Alex have been funding college courses to teach philanthropy for years.  This summer they're embarking on a very exciting new chapter of that work: the first Philanthropy MOOC.


MOOC stands for Massively Open Online Course, and it's all the buzz in higher education at the moment, as all the big players try to figure out how to use this new tool and reach the masses with their offerings.  But this is, obviously, a pretty big deal - they're launching this through their own foundation, with some impressive universities as partners.  They genuinely want to reach anyone and everyone who's interested.

You should be interested.

Not only is this AT MINIMUM a great way to gain some insight into how (some) big philanthropists think, it's a chance to put yourself in the shoes of someone giving away money rather than asking for it, and will help you refine your message when you go back to fundraising.  AND MOST IMPORTANTLY, it sounds like they've figured out a way to keep the most unique part of their standard college course: giving students a pot of money to distribute.

Read more about the Learning by Giving Foundation here: www.learningbygivingfoundation.org

I signed up.  Hope to "see" you in class!