You work hard for your money. So when you choose to donate your money to charity, how can you be sure the nonprofit organization will use your money properly?  

There are a couple things for you to do and consider.  

First, do your research before donating. Take a few minutes to visit the charity profiles here on this site, as well as the nonprofit's website where you can view their annual report, financial statements, and information about how they're making an impact.  

Secondly, when looking for charities to support, we encourage donors to check with charity validators like Better Business Bureau Wise Giving Alliance and GuideStar, two of the most highly regarded charity validators in the nonprofit and private sector. 

  •  The BBB Wise Giving Alliance Standards for Charity Accountability were developed to assist donors in making sound giving decisions and to foster public confidence in charitable organizations. The 20 standards cover governance and oversight, measuring effectiveness, finances, fundraising and informational materials. 
  • GuideStar is designed for nonprofit organizations to show their commitment to transparency and communicate directly with stakeholders. 

Lastly, learn more about the Overhead Myth. It's understandable that you want to invest in a cause, not line a nonprofit executive's pocket. But the fact is that overhead—the percent of charity expenses that go to administrative costs versus program costs—is a poor measure of a charity’s performance. Overhead  is a simple financial ratio that tells us nothing about a nonprofit's true impact or effectiveness. In fact, with clever accounting, a nonprofit can skew their ratio. It's far more useful to focus on true indicators of a nonprofit's performance: transparency, governance, leadership, and results.

That is not to say that overhead has no role in ensuring charity accountability. At the extreme the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good.

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

Read more about the Overhead Myth campaign sparked by GuideStar, BBB Wise Giving Alliance, and Charity Navigator, and see the back of the letter for research from other experts, including our own Snapshot 2014 research—as well as Indiana University, the Urban Institute, the Bridgespan Group, and others—that proves the point.

So when you are making your charitable giving decisions, consider the whole picture. The people and communities served by nonprofits don’t need low overhead, they need high performance.

Key Stats and Facts

The following information from the The Overhead Myth website shows that the overhead ratio is imprecise and inaccurate when it comes to measuring a nonprofit's true performance:

  • 37% of nonprofit organizations with private contributions of $50,000 or more reported no fundraising or special event costs on their 2000 Internal Revenue Service (IRS) Form 990
  • Nearly 13% of operating public charities reported spending nothing for management and general expenses (Source: The Nonprofit Overhead Cost Study), and further scrutiny found that 75-85% of these organizations were incorrectly reporting the costs associated with grants.
  • A 2006 CompassPoint Nonprofit Services study of nearly 2,000 nonprofit executives in eight metropolitan areas revealed that receiving general operating support played a major role in reducing burnout and stress among executive directors (Source: Daring to Lead 2006 - A National Study of Nonprofit Executive Leadership). 
  • In 2011, the charities which GiveWell reviewed and recommended had higher overhead than the charities they review and didn't recommend, 11.5% versus 10.8% (Source: Giving Evidence).

Underinvesting in overhead creates a range of negative outcomes which undermine quality and sutainability:

Description of Underinvestment

Consequences

1. Limited/no staff for administrative roles (e.g. finance, development, operations)

  • Limited ability for organization to manage/monitor finance, development, etc.

2. Limited investment in staff training and development

  • Increased turnover among staff, particularly those looking for ongoing professional development
  • Limited ability to continually enhance skills of employees
  • Difficulty building senior team from within

3. Inexperienced staff for administrative roles

  • High turnover
  • Poor work quality
4. Poor IT infrastructure
  • System crashes, downtime
  • Loss of data/information, limited information sharing
5. Poor donation management systems
  • Inability to track donors and fundraising progress
  • Limited ability to target fundraising
6. Poor performance management systems
  • Limited ability to track beneficiary outcomes, particularly across sites
  • Limited ability to easily generate reports for grantmakers

Visit http://overheadmyth.com for more information like this.