When donating money, it is often desired by the giver that the entirety of the donation is used for the exact purpose for which it was granted. Oftentimes, if this is not the case, it is considered to not have reached the “right” hands. When donations are made to sick children or victims of earthquakes, it is natural to hope all the money is channeled to the people directly affected. Yet the process is not so simple. Things like organizational costs that allow for these operations require funding too.
In order for any organization to function, it needs money to cover employee expenses, volunteer expenses, travel expenses, accounting, work equipment, employee training, electricity and water, or investments in additional fundraising. Without covering those costs, the organization itself would cease to exist. We call that amount “overhead” or “cold plant cost” or “general costs.”
Instead of evaluating an organization based on overhead costs alone, it is helpful to shift our thinking toward determining how well a nonprofit is converting overhead into service and social change.
On the other hand, the belief that general costs are negative is changing. More and more people are realizing that costs may have nothing to do with a nonprofit’s effectiveness. In fact, cold drive costs that are too low may be more of a cause for concern.
I remember when we were in initial discussions with one of our largest corporate donors who wanted to donate to Fund 5.5. They asked us: “What percentage of the donation do you need for operating costs?”. The answer of 10% was followed by the question: “Are you sure that is not too little? You know, you can put an organization in danger of imploding if you stretch yourself further than you can.”
How much is enough and how much is too much?
Mark Blumberg, an attorney specializing in nonprofit law, says: “Some charities may have overhead costs of 10%-15%, but many will quite rightly have higher overheads, including administration and fundraising, more likely in the 20%-35% range. You have to look closely at the individual charity, how it operates and what it spends money on. It could be that a charity with 20% overheads should spend 25%, while another charity with 15% overheads should probably spend 10%.”
What we all need to ask is that each organization clearly publishes what percentage of the donation it needs in order to carry out everything planned. Transparency is necessary when collecting money from donations and distributing it within an organization.
Lawyer Alexandra Tzannidakis notes that: “the emotional nature of charitable giving can perhaps blind people to the reality that charities are very much businesses – as they must and should be. The difference is essentially in their goal: they have donors who want program results, instead of shareholders who want profit results. But just because the destination of the generated money is different, it does not mean that the internal mechanisms for generating it are necessarily different. Like any for-profit business, a charity’s administrative costs can be crucial to maximizing its impact.”
In my opinion, as the manager of the SOLIDARNA Foundation, for Croatian circumstances, it is perfectly fine for the organizational cost to amount to 10-20%, and for 80-90% to go to direct program costs. Of course, it depends on the complexity, quantity, duration, number of users and the like. On the other hand, research has shown that individual donors are perfectly fine with the operating cost going up to 25%. Anything below 10% can lead the organization to do a worse job, and eventually have to shut down.
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