How much is too much for a nonprofit to spend on itself?

Scandals concerning nonprofits misusing funds, such as the recent one with the Wounded Warriors Project, understandably increase donor’s unease about finding worthy charities to support. Philanthropists want to know that their grants are going to the causes that are dear to their heart. When they hear about nonprofits spending extravagantly on conferences or so their CEO can arrive at events by rappelling down a building, they are understandably outraged. But this shouldn’t deter donors from philanthropy altogether. Instead, scandals like this should remind philanthropists to do the due diligence needed to identify effective and well-run nonprofits.

So how much is the appropriate amount for a charity to spend on itself versus its programs? Better Business Bureau’s Wise Giving Alliance recommends that a nonprofit should spend at least 65% on programs, so less than 35% on staff, communications, rent, etc. This seems reasonable, but in reality, the answer is more complex than applying the same percentage to all nonprofits.

As my colleague, Christine Kendall at SmarterGive notes in a recent blog, if you were investing in a for-profit company you would be concerned if it had not invested sufficiently in its own infrastructure. The amount that a nonprofit dedicates to its own staff, resources, technology, collaboration efforts, etc. (“overhead”) depends on the scope and scale of its work. An organization that is global in scope and attempting to cure an intractable disease, for example, will undoubtedly need to spend more on expert leadership, travel, and partnership efforts than a local food bank or other narrowly focused organization.

The increased focus on evaluating charities based on the percentage of funds that go to programs versus overhead has resulted in nonprofits often being underfunded and sometimes going bankrupt. I am proud of my local San Diego Grantmakers who, along with its peer regional associations of grantmakers in California, has catalyzed a statewide conversation and prompted action to increase understanding about the Real Cost of a nonprofit’s programs and operations required to achieve its outcomes. A healthy nonprofit should have adequate funds to support its programs, its operations (such as staff and infrastructure), and sufficient capital reserves for long-term sustainability. Some funders are moving in this direction and are adopting a full funding approach to their grantmaking where they will invest in the infrastructure and stability of a nonprofit along with its programs. These include PIMCO Foundation, Ford Foundation, and Irvine Foundation. I hope to see more philanthropists, including individuals and families, move in this direction. The question should not be how much is too much for a nonprofit to spend on itself, but rather: what is the real cost of realizing lasting change in some of our most pressing problems?

Donors of all sizes need to consider a variety of factors when conducting due diligence on potential charities to invest in. These include:

  • Does the staff have the necessary expertise in both the issue, approach and management skills to achieve the organization’s goals?
  • Does the organization have a clear strategy guiding its work? Do you agree with that approach?
  • Does the organization have the necessary resources, technology and tools necessary to do its work and scale, as needed?
  • Has the organization partnered with the organizations it needs to in order to do what it says it will do?
  • What do others in the field say about the organization?

This level of due diligence takes time, but it will help ease a donor’s fear of giving to an unworthy charity. It will also uncover needs that a nonprofit might have in addition to supporting its programs. My hope is that funders will begin to take a holistic approach to their support of a charity – investing in programs as well as the organization itself.