Happy New Year!

30 Dec Happy New Year!

Dean Kaplan wrote an editorial opinion piece that was published in my local paper last week. The paper identified Kaplan simply as a professor of economics at Yale University. The piece was yet another in a long line of recently published opinions related to management and fundraising “overhead” expenses presented as a percentage of a charity’s total expenses. I myself have opined on the subject here (But Raising Money for Programs is Easier!).

But Kaplan is writing to donors, and his perspective provides some useful insight for charities as well. Kaplan warns donors that readily recalled stories of charity fraud create an “availability bias” that can lead to poor decisions. In other words, a few charities are bad actors therefore all charities are suspect.

He suggests that some donors reasonably turn to IRS data for perspective. Using available 990 data, donors can calculate the “overhead ratio,” but Kaplan warns that whereas this calculation might help weed out those few bad actors, the ratio isn’t much help otherwise.

For one thing, the overhead ratio is simply a one-year data point. Perhaps the organization is investing in new infrastructure, or is working on two and three year grant cycles, or any number of other reasons for a one year anomaly. (A five-year average might provide a better snapshot, but that information is not as readily available.)

Too, the overhead ratio does not have a generally acceptable standard. Quick – two organizations exist with similar missions. One reports $15,000 on overhead against a total budget of $100,000. The other spends $135,000 on overhead against a total budget of $400,000. Which will spend your money more wisely? Kaplan’s point is that you can’t tell. The first might be more frugal but less effective. The second spends twice the ratio on overhead while having three times more money available for programs.

“The tax data reveal almost nothing about whether a charity is effective,” says Kaplan. “What we should be looking for is the impact a charity is having.”

So this got me thinking: how would a donor know about the impact a land trust is having? I think organizations have a role to play in helping here by doing three things. As you prepare your end of year communications with donors, keep these in mind:

1. Avoid the temptation to feed the overhead monster. Let the IRS data lie there essentially ignored. Don’t talk about your overhead. Don’t graph it in your annual report. And above all, don’t brag about it.
2. Use the “availability bias” in your favor by regularly trumpeting your successes. Be the organization that always seems to be getting something done.
3. Find and invite those outside the organization to tell your story for you. What my friends think about you is more important than what you tell me about yourself. The best communication is viral (assuming it’s positive).

In 2015, how will your donors know their money is being invested wisely?

Happy New Year! And all the best wishes for a peaceful and IMPACTFUL 2015!

-da

Photo credit: Courtesy of Walt Kaesler.