Overheads are the cause

Beth worked as a sustainable funding consultant at NCVO, specialising in business planning, fundraising portfolio analysis and new product development. Beth left NCVO in July 2014 but her blog posts are kept here for reference.

Overheads are a hot topic for charities at the moment. Here I offer a few thoughts on what fundraisers should consider.

If you haven’t already, you should check out Dan Pallotta’s TED Talk. He brings thinking from the private sector and challenges us to think about tackling some of the barriers that non-profit organisations face in solving complex social issues. What I take from it is that the way we think about charities – the infrastructure, ability to ‘invest’ in the cause, and to some extent the notion of philanthropy – is not conducive to actually changing the world. Controversial, huh? But he has a point.

100% goes to the cause. Really?

I know a charity that does this on one of their fundraising products: “donors love it, it’s so efficient!” But it often means that the donors giving to the charity’s other products/ appeals are paying the overheads, or alternatively, the charity may be using income from investments, contracts or trading to cover overhead costs. So if we’re being fully transparent, it’s not that the charity doesn’t have overheads – it’s just offering a particular group of donors a way around them.

For the organisation, it can also mean that a higher proportion of income is restricted and this could limit investment in organisational development – or put in a more donor-friendly way, its ability to invest more in the cause.

In another, similar example, Simon Scriver blogged about the innovate Charity: Water who claim that 100% goes to the cause – Simon argues that it isn’t possible.

Is there a correct answer to overheads ratio?

Is low efficient? Or is low restricting organisational development and therefore sustainability?

I think it depends on your organisations and a few other things. Here are my top three considerations for fundraisers:

1. Balancing a portfolio

While we’d all like to think that every fundraising product pays for itself, we know that not all of them do. Just as in the commercial world, sometimes the most profitable products provide breathing space while others come to maturity. Knowing what point in the lifecycle your fundraising products are at and projecting when they might mature and how long for is really important.

2. New product development: failure and risk

A strong theme in fundraising innovation at the moment is that of failure: failure is good, push new ideas through to testing quickly, and accept that not everything will work. It’s really great that those charities with strong leadership and with reasonable budgets are able to do this and I broadly agree with it – it’s coming from a good place. But the general public don’t like failure of a direct mail pack in the name of innovation, they like giving to those in need. I’m interested to hear how charities are balancing this caution versus confidence in communicating new fundraising initiatives with their donors.

3. External events/ emergency appeals

Emergency appeals and significant external events can significantly increase income to organisations with comparatively less investment. If you’re working for one of these organisations or you’ve just had a huge legacy, think carefully about stating your overheads ratio – it might not happen again next year.

Overall, it’s not just a case of being able to communicate how effective you are to donors today – it’s about managing a balanced portfolio so that you can meet the need of your beneficiaries now and in the future.

In this video, Peter Drury talks about communicating overheads to donors – he suggests that talking about costs provides an opportunity to explain them.  If you have any good examples of communicating overhead costs/ ratios, do let us know.

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2 Responses to Overheads are the cause

  1. The main challenge for charities is to reconcile the reality with the perception or desire of a donor. I am often asked “how much directly goes to beneficiaries” when someone here about my day to day involvement in the charities.

    Basically, it depend on how you count or present the financial information. Somehow it is in the donors or average people mind-set that 100% donation to charities must be directly given to beneficiaries without realising how this is going to be delivered.

    Charities should focus on what they do and communicate them effectively instead of too much attention to overhead.

  2. Morgan Hunt says:

    Lower overhead does not necessarily mean being more effective. For example you can generate a higher ratio of wealth from more investment. And sometimes wealth generating activity needs to ascend to a higher/end goal. Fundraising is a skill like any other; you need to be creative and ‘gutsy’; not afraid to speak your mind, ask for money, tap into funds. Among the skill set should be some solid commercial principles like understanding the difference between a surplus and profit. For example you can have a surplus and still make negative profit. Low overhead doesn’t necessarily mean an organisation is good at its cause, or that its turnover is low and its people productive; or that the group is spending wisely.