LESSON 30 OF 40: Are You Competing Based on Overhead—Really?
Boards should know the back-story on a ministry’s overhead.
THE BIG IDEA FROM THE BOOK: The giving public often looks at just one piece of financial data to inform them whether a ministry is worthy of their support. This is the ministry’s overhead.
In the world of nonprofit accounting, this is comprised of General & Administrative expenses and Fundraising expenses. Unfortunately, the calculation for these expenses can be subjective and not a true indicator of how effective a ministry truly is.
It is appropriate to report on the overhead percentage, but to promote it extensively in fundraising material suggests a level of precision that does not exist.
• “Effectiveness and efficiency are not functions of overhead allocations.”
• “Overhead rates are highly subjective and defy precision.”
• According to respected CPA and auditor Michael Batts, “Functional expense reporting is voodoo.”
MY COLOR COMMENTARY:
When you go to Walmart to purchase a new iron, do you evaluate how much Black & Decker spent for marketing, R&D, accounting, IT, and CEO compensation—to produce the iron? Absolutely not. What is your primary question? Is it worth $29.99 to purchase this iron to meet my ironing needs? The value proposition is whether the price is warranted to accomplish your objectives.
In a similar fashion, the question that should be asked of a nonprofit is whether they are accomplishing their objectives and truly producing a meaningful impact. It should not be focused primarily on internal overhead calculations.
I would rather contribute to a ministry that had a 50% overhead allocation that effectively accomplished their purpose like nobody else—than a ministry that had a 5% overhead allocation that was ineffective. At the end of the day, I want my $29.99 donation to make a difference in someone’s life.
THIS WEEK’S QUOTES & COMMENTARY BY DAVID BEROTH:
DAVID BEROTH is the CFO of the Billy Graham Evangelistic Association where he has served since 2016. He also does a monthly podcast (as a hobby) to serve other financial leaders. The podcast can be found at Christian Nonprofit CFO. David previously served as the CFO of Seed Company, an affiliate of Wycliffe Bible Translators. He and his wife have been blessed with four boys along with a two-year-old princess, and they live in Charlotte, N.C.
TO DO TODAY:
• Make sure your desired ministry impact is well-defined.
• Spend more time promoting your actual impact rather than polishing your calculated overhead.
• Visit the ECFA Knowledge Center and read and share the short chapter, Lesson 30, “Are You Competing Based on Overhead—Really?”
NEXT WEDNESDAY: On July 29, 2020, watch for the commentary by John Ashmen on Lesson 31, “Where Two or Three Are Gathered on Social Media. Conflicts of interest always sound more questionable on the internet and social media.”