09 May 2013

Turns Out Overheads Might Indicate Good Charities

Overhead has become a totem in the humanitarian world as charities and aid organizations seek to spend the most on services and the least on administrative costs.

An analysis of charities shows that overheads matter, but not in the way you might think. It turns out that more effective charities spend more on administrative costs like staff salaries, office supplies and so on.

Watchdog organizations like Charity Navigator have used overhead percentages as a part of determining whether or not a charity is good. Charities that spend less on administrative costs, get a better score from Charity Navigator. Administrative costs include staff salaries and the cost to make things run. The trend has led to some more creative accounting practices.

But some think this is misleading because they separate the costs to hide the fact that it actually costs money to do the work.

For example, charity:water says that it has no overhead costs. According to charity:water, every dollar donated or raised goes towards projects. That means there are two separate pots of funds. One goes to projects and is funded by public donations. The other is for administrative costs and comes from Angel Investors like Michael Birch who has donated $4 million to charity:water to support its administrative work.

A backlash to the overhead push says that overheads are less important than impacts. Sometimes organizations need to invest money in staff to do the job right. Opponents say that putting too much emphasis on overheads can distort the truth about a charity and mislead potential donors.

Water for People CEO Ned Breslin advocates for a greater focus on program and impacts, rather than overheads. In the Huffington Post, Breslin told the story of how boys in India were using a handpump as a wicket for their cricket match because it no longer worked. He points out that too much fanfare about the wrong things can lead to solutions that breakdown.

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