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The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio. The ratio is a measure of how much of each dollar donated goes to “programs” versus other costs like executive salaries and fundraising. It’s understandable that many donors want as much money as possible to go to people in need.

But donors who use overhead ratios to evaluate charities are doing more harm than good.

There are plenty of reasons that overhead ratios are meaningless as a measure of effective charities:

• It tells you nothing about the impact the charity has on people it’s trying to help
• The rules for determining overhead costs are vague and every charity interprets them differently
• Accounting experts estimate that 75% of charities calculate their overhead ratio incorrectly
• It discourages charities from investing in tools and expertise that would make them more effective

In short, picking a charity based on the lowest overhead ratio is like buying the cheapest car that money can buy. You might spend less in the short run but it’s inevitably going to let you down.

That of course doesn’t mean that all financial data about a charity should be ignored. Smart donors should consider a charity’s finances when making a decision. But the question donors should be asking is, “How much of your budget are you spending on making sure your programs are effective?“

Until the new year we’ll be writing at least once a week about the harm that the use of overhead ratios does. We’re joining with a number of organizations to put a stop to donors’ reliance on overhead ratios. Together, Philanthropy Action, Charity Navigator, GiveWell (Note: I serve on GiveWell’s board), Great Nonprofits, Guidestar and Philanthropedia have issued a press release today explaining why you shouldn’t use overhead ratios and what some alternatives are.

We hope you’ll join us by blogging, tweeting, facebooking, emailing, and of course, talking to your friends, neighbors and co-workers. Tell them that overhead ratios are the worst way to pick a charity this year.

You can download the press release here.

Comments

I agree with nearly everything you say in this post. Right on!

Except for one thing…

A charity chosen for it’s stated low overhead is not “inevitably going to let you down”, like a car chosen for it’s low cost. It MAY let you down… or it may not. There is just no connection between overhead and quality.

To use the car analogy, chosing a charity based on overhead seems more like chosing a car based on it’s color…

December 03, 2009

Choosing a charity based on overhead is more like choosing a car based on its mileage. The overhead, like the mileage, is a proxy for efficiency (charity) or future drivability (car).

December 15, 2009
Editor

Chibinium

your view is a common one—and it is 100% wrong. Overhead ratio is a proxy for nothing useful when it comes to evaluating a charity for all the reasons mentioned in the post:

1) it tells you nothing about effectiveness
2) the figures quoted by the charities are wrong
3) it discourages charities from doing things that would make them more efficient, effective and improve their future “drivability”

December 15, 2009

What we need is more than one metric.  Overhead, combined with one or more measures of effectiveness and transparency, would make a nice dashboard by which to evaluate charities. Also needed are standards and audits of how overhead and other figures are calculated, in order to have apples-to-apples comparisons. 

Let’s not throw the baby out with the bathwater.  Overhead is a useful metric.

November 02, 2010

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