In the non-profit world, overhead is a very big deal the lower the better.
Consider the Child Care Resource Center Inc. in Van Nuys, which, according to regulatory filings, spends 99.6 percent of its annual funding on programs not administration or fundraising.
But how could that happen? Michael Olenick, president and chief executive of the child care organization, acknowledged that it can’t. “I don’t want to make anybody think we work for free,” said Olenick, who received a relatively modest annual compensation of $91,410 in 2004. “We have all the standard things that every business has, like HR, finance, facilities management.”
Administration, he said, actually runs close to 8 percent of total costs, but they can be placed into the program-related pie. “I don’t think anyone believes that 100 percent of what comes in goes out the door,” he said.
Running a lean, efficient operation, always an important goal for non-profits, has become even more critical in a year that saw many of the charitable dollars going to high-profile disasters, such as Hurricane Katrina and the Asian tsunami. Nationwide, charitable giving could top the record $248.5 billion in 2004, according to the Giving USA Foundation, and despite concerns about “donor fatigue,” end-of-year giving has been generally strong.
The focus on operations also comes at a time when non-profits are under more scrutiny than ever, after several financial scandals. The Senate Finance Committee has been holding hearings on the sector and is expected to recommend stiffening penalties for financial irregularities, additional IRS reporting requirements and tougher governance regulations.
Charities have felt the pressure and have become more efficient: About two-thirds of the 50 non-profit organizations on the Business Journal’s list reported spending 90 percent or more of their funds on programs and services, leaving less than 10 percent to pay rent, utilities and payroll. Five reported spending over 99 percent for programs and services.
What is administrative?
For non-profits, efficiency numbers or how many cents of the dollar go towards programs and how many towards salaries and administration are as important as earnings reports are to companies. “People are able to compare the charts, and they look at that administrative slice,” said Mary Genis, owner of Sintra Consulting, a strategic planning firm for non-profit organizations.
There is some concern in the non-profit world about the rash of high efficiency numbers, but most acknowledge that increased scrutiny and audit requirements mean the numbers are more reliable than in the past. A 2005 state law requires audit committees for larger charities.
“I’ve heard people say they’re 99 percent efficient, but I’ve never heard of a non-profit organization that only uses 1 percent for operations,” said R. Christine Hershey, founder and president of Cause Communications/Hershey Associates, a marketing firm that serves non-profits. “We need to be really careful. People twist themselves into all kinds of pretzel configurations to meet numbers.”
They often make it work through meticulous accounting specifically, identifying the expense as part of the program rather than the overhead. “Whether you call a particular expense a program expense or an overhead expense, there is not a bright line between the two,” said Stephen Burrill, managing partner at accounting firm Deloitte & Touche LLP, who focuses on non-profits. “People in the industry focus on a benchmark of having your overhead expense be 15 percent or less.”
For example, non-profits used to consider an executive director’s salary as administrative. But a director usually handles fundraising, recruiting and public appearances. “So having all of the executive director’s salary going towards administrative expenses doesn’t make sense,” said Alan Strand, director of finance and quality reporting for the California Association of Nonprofits.
Lower-level employees, too, take active roles in both program activities and fundraising or administrative work. “Nonprofits need to be more savvy,” Strand said. “You don’t want your highest-paid person stuffing envelopes.”
In-kind donations are another way to keep expenses low. The AIDS Healthcare Foundation, (No. 12 on the Business Journal list), runs 30 clinics worldwide and has 800 employees, but spends only 9 percent of its funds on overhead.
This is possible because the organization receives donations from pharmaceutical companies such as Gilead Sciences Inc. which has provided three years worth of HIV-treatment drugs for Uganda, according to Laura Nelson, chief financial officer of the foundation. For accounting purposes, the donated drugs are valued at the purchase price in the country of use. As the drugs are prescribed, they get expensed.
The organization also earns revenues from its 22-store thrift store chain, Out of the Closet, which it can use toward operating expenses rather than using donated dollars.
Paying the water bill
Part of the pressure to keep the efficiency percentages high comes from donors and grant organizations, according to Susan Grinel, director of the Family Foundation Center at the Jewish Community Foundation, which helps donors set up charitable foundations and advises them in grant giving. “Some donors especially newer ones want to know their dollars are making a difference,” she said.
That means directing donations to program-related expenses, (called restricted donations), instead of unrestricted donations that could be used for anything, including the water bill. “No one wants to fund the finance department,” said Olenick. “But if we didn’t keep the books right, everyone would be jumping down our throats.”
International Medical Corps., which was among the first to send medical teams to tsunami-ravaged Indonesia, spends 96 percent on programs, which Chief Executive Nancy Aossey says helps immeasurably in seeking donations. “We’re very proud of our efficiency numbers,” Aossey said. “When people hear about us, they love to donate because they want their money to go toward programs not toward advertising.”
Most of the Los Angeles Regional Foodbank’s employees are engaged in “foodraising” seeking donated food, much the way other organizations fundraise. But since food is the organization’s core mission, much of the staff’s work can fall under program expenses, rather than under the administrative column.
“We spend quite a bit of time doing analysis, and we take a conservative approach to our accounting,” said Michael Flood, the food bank’s executive director.
With a cash budget of $7 million, the organization handled nearly $55 million in donated food last year, and spends only 2 percent on overhead costs.
Selwyn Gerber, professor of non-profit accounting at the University of Judaism, said a portion of a non-profit’s expenses are often taken out of endowment funds, or special reserves, so therefore don’t count as operating expenses. “Some of it is entirely appropriate, and some of it, as always, is not appropriate,” he said.
Gerber said accounting is still an art as much as a science and employees can fall into a gray area. “Are they part of general overhead, or are they part of services?” he asked. “Almost anybody in administration is going to be doing some of each.”
*Business Journal researcher David Nusbaum contributed to this story.
