One night last year, I was in Westport. It was dark, cold and starting to rain. On one corner a young man was soliciting donations for a well-known international nonprofit. Usually I try to avoid these solicitors, but this time I stopped and talked. He gave me his spiel, and I donated $20.
Soon I started receiving all kinds of information from the nonprofit. I got several mailings, hundreds of emails and a few phone calls. All of the communication that I received must have cost nearly $20, right? I wondered how much of my contribution actually went to the organization’s cause and how much went to the U.S. Postal Service.
All nonprofits keep track of the percentage of contributions that go toward fundraising and administration costs, and this information is easily available to you as a potential donor. However, the information we get may be disconcerting. We donors are often frustrated to learn that half of our donation — or less — goes to the “cause” and the rest goes toward the organization’s advertising, fundraising or administration costs.
Nonprofits are familiar with this chagrined donor and most will do all that they can to lower their operational expenses. Many even forgo organizational needs in order to lower overhead. Some of these issues, like understaffing and insufficient office space, seem like a small inconvenience. Other hindrances, like poor marketing, are more significant. But both will have a negative effect on the organization.
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Dan Pallotta, creator of the Breast Cancer 3-Day Walks and author of “Uncharitable: How Restraints on Nonprofits Undermine Their Potential,” explains how the misunderstanding of overhead costs led to the demise of his for-profit company. Pallotta TeamWorks functioned as a contractor with various charities; it charged charities a fee for the service of organizing fundraising events such as like the 3-Days and the AIDSRides. During its nine years of existence the company said it raised $305 million in unrestricted funds for charities after all expenses were paid.
This sum is nothing to scoff about in the nonprofit world. However, as news spread about Pallotta TeamWorks’ charity events, the public took notice of the organization’s high overhead costs. The media frenzied over Pallotta’s salary — nearly $400,000 — and the company’s extravagant fundraising expenditures. Because of the negative press, charities ended their relationships with Pallotta’s company, and, in 2002, it quickly collapsed.
Pallotta’s company was condemned for its aggressive advertising, fundraising campaigns and ultimately its for-profit business model. Yet critics failed to consider that the company’s formidable bottom line was a direct result of its successful investments in fundraising and management.
Not all organizations aspire to the big money that Pallotta TeamWorks did. However, Pallotta’s argument still rings true for all charities: fundraising and administration are essential to an organization’s success and they are worth investing in. Some nonprofits have a 10 percent overhead, others have a 50 percent overhead. But how much do the overhead costs matter if the organization is effectively and consistently changing lives in your community, the nation and the world?
Next time you donate to a nonprofit, go ahead, ask the staff how much of your contribution will go to overhead costs. But also ask, What am I investing in? What do you do best? What are you trying to do better?
These questions will lead you to the heart of the organization and help you decide — is it something you want to be a part of?
Anne Foster, a Kansas City native, worked at an international nonprofit based in Kansas City and volunteered with many local nonprofits. She currently lives in Brooklyn, N.Y.