Ratios are a great tool to compare nonprofits and help us determine which are most efficient and effective in meeting their missions.  Thank heavens we have an objective means to compare different nonprofit organizations, by looking at the ratio of administrative and fundraising costs to program costs recorded on an organization’s 990!

  Hopefully, most readers will immediately recognize the above as sarcasm!  As those of you working in nonprofits know, this much touted ratio is a problematic one, to say the least.  Here are some examples that illustrate why it isn’t particularly helpful:

-A small nonprofit offering support groups and activities for cancer survivors has grown from an all-volunteer group to an organization with two staff people.  Most services are provided by trained volunteers (most are cancer survivors themselves) and the staff focuses on fundraising support, administration and volunteer management.  This organization appears to spend a disproportionate amount of money on administration and fundraising, but they are actually leveraging a great deal of volunteer assistance which is not reflected on their 990.

-A small immigrant and refugee organization operates on an all-volunteer basis to provide social services, cultural activities and youth tutoring within their ethnic community.  The organization’s total budget is $10,000, which mainly underwrites program expenses like snacks, transportation and drill team and soccer uniforms.  Their effectiveness at increasing youth academic performance and helping community members find jobs has gotten them noticed by several funders, but they lack grantwriting skills and financial management software and training, so foundations are hesitant to fund them.  One funder offers $10,000 in technical assistance funding which they use to build capacity over the course of a year, doing board training, installing Quickbooks, training a community member to do the bookkeeping, and hiring a grantwriter to write several proposals for additional programs.  At the end of the year when they go to do the 990, they discover that half of their budget is classified as administrative and fundraising expense.  

Many people do not realize that almost all the consulting assistance that I provide to organizations is classified as administrative.  The following are examples of capacity building activities that are generally classified as administrative: financial audit, organizational assessment, board retreat, board training, strategic planning, implementation of a new data base, financial management software upgrade.

As a consultant who builds capacity of my nonprofit clients, I am a true believer in the value of “capacity building” for nonprofit organizations.  Nonprofits and their clients benefit from strong, efficient infrastructure, strategic planning, program evaluation, financial management and leadership development.  In fact, it is vital that nonprofits bolster their capacity in all these areas to inspire confidence in donors and funders and remain competitive. Sadly, at the same time that funders are communicating the importance of capacity, there is also a great deal of discussion about lowering “overhead” a.k.a. administrative and fundraising expense.  So, in a year where an organization commits to “taking their systems to the next level”, their 990 will look bad and may get them kicked out of workplace giving campaigns, declared ineligible for some funding rounds, or criticized by “saavy” individual donors who like to check Guidestar before writing a check.  In particular, small organizations are hurt by over-reliance on this ratio—they lack economies of scale, and any given purchase, upgrade or consultation represents a greater percentage of their budgets. 

If I haven’t convinced you yet, here’s a link to a great post on the topic by Lucy Bernholz, on her excellent blog, Philanthropy 2173.  See also Social Venture Partners Seattle’s Things we’d like to tell every new philanthropist, lesson 1.  

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