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Boulder Daily Camera
Making Money Matter
Enid Ablowitz

Making Money Matter

August 2003 Column

Enid Ablowitz

100% to Charity

In the current climate of hyper-accountability, many donors are rightly questioning the administrative, management and general operating expenses of non-profit organizations, particularly with some of the high profile abuses that have come to light.  There have been reports of third-party telemarketers that generate only cents on the dollar to the organization, or astronomical salaries for CEO’s of large national charities, or even mis-directed funds.  It is no wonder donors and organizations are taking a closer look at the costs of doing business in the charitable sector.

Wouldn’t it be grand if all monies donated could pass directly to the intended recipients?  Well, yes, but what does that mean?  I suppose it is possible that a small non-profit can be run entirely by volunteers who dip into their own pockets to pay for paper, postage, filing fees, or telephone bills, but any organization that has a paid director and an office incurs legitimate costs—the overhead that  keeps the organization running. The real challenge is to understand the components of overhead and determine what is appropriate for any given organization.

Without strong, passionate leadership and the ability to deliver the impact intended, the right kinds of programs and services might not exist.  The first and most obvious kind of overhead is compensation for the people who run the organization, from the director/CEO to the program managers, to financial personnel, to database management staff, to development officers, if applicable.  In a small operation, all those functions might be done by one person; in larger operations there may be functional departments.  The administrative budget of the non-profit has to be proportional to the overall level of activity, the appropriate management demands and expectations, the necessary work-space, the legal, accounting, insurance and other expenses required for compliance, and the highest possible remainder for direct distribution for programmatic impact.  It is no small task to create that proportionality, and many organizations are struggling to find the right equation.

To demonstrate the dilemma, let’s look at the evolution a one hypothetical non-profit:

A group of 5 women found a non-profit to support breast cancer patients.  In the first year of operation, they all volunteer their time, they work as a committee, and all legal and accounting services are donated. They raise $6000 dollars from family and friends, get their 501(c)3 IRS legitimacy and are proud that all the money goes directly to the intended recipients.  In the second year, they decide to send out a mailing to raise more funds. They print materials, buy postage and spend about $500.  They incur their first “overhead” but they raise $10,000.  They spend 5 cents on the dollar or 5% and are able to pass on $9500.

By year 3, the number of donors has grown to several hundred and they need to purchase a computer, database and accounting software. Their accountant and attorney begin to charge modest fees for their services and they are advised to have liability insurance. Of the original 5 women, one has emerged as the leader and has committed to working half-time for a small salary.  She also hires a 10 hour a week staff person to answer the phone, generate the growing number of receipts and thank you notes, and develop a web-site. They outgrow the kitchen table and rent a small office.  The new director wants to “take the organization to the next level” and decides to formalize the advisory board, adding 8 more people and planning quarterly meetings.  The cost of doing business is $35,000 and they raise $100,000.  $65,000 goes to the intended recipients, and the overhead rate is now 35%. 

In the first year, 100% went to charity, but the actual amount of direct distribution was $6000. By the third year, they were able to make grants of $65,000, more than 10 times the impact, but their overhead rate has jumped to 35%.  Now suppose that in year 4, they are able to maintain the same level of administrative expenses and can raise $250,000.  $215,000 would be available for their programs and the overhead rate would drop to 16%.

What’s the lesson?  Overhead is not a dirty word, but it must be rational, transparent, and proportional.  Sometimes in start-up phases of new charities or programs within charities, the cost of doing business may appear to be excessive when the expenditures are actually intended  to “prime the pump.” 

On the other hand, overhead can escalate so that the costs are disproportionate.  Hard as it might be, management must then do what for-profit business does:  cut, consolidate and cooperate. 

Just as donors need to understand the legitimate costs of charitable enterprises, every non-profit organization has the obligation to be fiscally responsible or risk losing their donors.

You may contact Enid Ablowitz by email at enidablowitz@hotmail.com

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