Six Reasons Non-Profits Fail, Reason #4: Obsession with Percentages

“It sounds like you’re cooking the books,” I said.  And the executive director went absolutely nuts.  I wasn’t surprised because I had been in this conversation hundreds of times before.  But I had to tell it like I saw it.  Plus, it’s a topic that is very troubling to me for all the reasons I will explain in this post.

“Cooking the books” is a phrase used in the commercial world that, essentially, means changing the relationship of numbers in the financial records of a company in order to present a different “face” to the state of the company.

Putting the best light on it, “cooking the books”, is a way that businesses make things look better than they are in order to appease stockholders.  Stated more negatively, “cooking the books” is a buzzword describing fraudulent activities performed by businesses in order to falsify their financial statements.

So, you can see why the executive director got so mad at me.  By using those words, he believed that I had accused him of falsifying his organization’s numbers.

I probably shouldn’t have said it.

But I have had enough of non-profits saying their overhead is 3 or 4% or even 8 to 12% when I know better.  And in that instance, my mouth got in front of my brain.

This obsession with overhead percentages is so interesting to me.  Here’s why:

Over the years we have trained the giving public that low overhead is good.  Somewhere along the line, someone came up with the idea that non-profits can operate their “business” in a substantially different way than a commercial company.

Somehow, rent should be cheaper, labor should be cheaper, the non-profit should not need the same kind of I.T. department or HR function, or not have a sales force (MGO’s) or not have any of the same marketing, sales, finance, operations and administrative functions as a successful business.

Where did this idea come from?  I have no idea.  But it is my belief that there is a direct correlation between an obsession with percentages and a lack of obsession with impact.  And a non-profit that is on this path is on a path toward failure.

I continually tell people that the only difference between a non-profit and a for-profit organization is that the non-profit does not pay taxes. But the giving public, for the most part, thinks that low overhead is good – even overhead that, when you think about it logically, cannot possibly be true or even practical.

The fact is, it essentially costs the same to run a non-profit well as it does a business.

I was at a board meeting making a presentation on the marketing and fundraising plans we had created for a major non-profit.  There were some very successful business owners and CEOs sitting around the table.  As I was making the presentation, the conversation segued off into overhead.

One of the business owners – a man who had started a very successful high tech company – spoke up and said,  “I am very concerned about the overhead of this organization.  We really need to hold our overhead percentages at 12%.”

I had anticipated this comment because I knew Larry (not his real name) and I had been briefed about his energy on this topic.

So, I jumped in and said,  “Larry, I’ve been reading about your company.  Things are going well, aren’t they?  I think you are up to $600 million in revenue now, right?  But I have some suggestions for you that will increase your profits substantially.”

He leaned forward, fully engaged.

“You need to outsource your HR and I.T. functions,” I said.  “Plus, you need to cut your sales force in half – there is way too much expense there.  The cost of your employee benefits could be reduced by 10% saving you millions of dollars….”

And I went on with a list of ridiculous ideas that would have decimated his organization, had he implemented any of them.

Then I stopped and fell silent.

Larry shook his head and said:  “Richard, I couldn’t do any of that.  If I did I would not be able to run the organization.”

“Exactly!”  I said.  “And why do you think this good organization can run on less than yours can?”

It was a turning point for Larry and that organization.

The fact is that this percentages thing, as Jeff and I have mentioned several times in this blog, has run amuck!  There are thousands of organizations out there still claiming their overhead is under 10%!  Whew – amazing.  And now it is becoming just as ridiculous to claim that overhead is under 20%.  Really?  You can successfully run an organization for under 20% overhead?

I know that, to many people, my statements above are upsetting.  And the reason is that they are working hard to maintain a paradigm that is outdated.  The new generation of donors understands what it takes to successfully run a non-profit.  They are more concerned about impact than they are overhead.  And that is where our attention should be.  How many lives are we saving or impacting?  How is our planet a better place because of our efforts?  That is what is important.

Am I suggesting that there should be no controls or standards on overhead?  Of course not!

There are scam artists out there who set up non-profits simply to line their own pockets.  There are also well meaning leaders who have not managed things properly and they now are in a situation where serious pruning needs to happen in the organization, but they lack the courage to do it.  So they “cook the books” to make it look better.  And THEY need to be disciplined and controlled.

But, for the most part, there are thousands of non-profits out there doing a fantastic job, but laboring under the false premise that overhead under 20% is THE standard for a well run non-profit.  And that is pretty sad.

Those organizations and leaders who continue to be obsessed by this will have their focus on their financials and not on the cause they have signed up for, which means they are on a path toward failure.

It is a delicate dance, I know.  Overhead DOES need to be watched and managed.  But IMPACT is the objective.

This is an interesting subject in the major gift field.  It’s interesting because in major gifts you have the opportunity to discuss these things in person with the donor and reason them out.  And I have found that most donors, when they fully engage on this topic, are reasonable and practical people.

In the next several months I am going to organize a group of successful CFOs (Chief Financial Officers) of several non-profits as well as commercial companies to develop a comparative study on overhead in non-profits and commercial businesses.  My objective is to publish a new standard and put out in the non-profit marketplace a call to reality on this subject.  It should be interesting.  Stay tuned.

In the meantime, as you deal with the donors on your caseload, keep all of your conversations filled with the difference your donors’ giving is making and the impact your organization is having in changing our world.

THAT is what matters.

Richard