Why Nonprofit Overhead Matters: Debunking The Overhead Myth Once and For All

Expressed in the most gut-level of ways, nonprofits exist to make the world a better place. They feed the hungry, shelter the homeless, educate the children, and support countless other worthy causes. Yet, ironically, many nonprofits still operate under the crippling assumption that “overhead spending” is a dirty phrase. For the longest time, we’ve been told that a nonprofit’s success is measured by how little it spends on administrative costs and overhead compared to program costs. This way of thinking has shaped donors’ expectations, board decisions, and even the nonprofits themselves, often to the detriment of the very communities they serve.

In this article, we’re going to shine a spotlight on the concept known as The Overhead Myth, explore its history, discuss how the conversation has evolved, and—most importantly—explain why overhead spending can actually be a good thing. Get ready: we’re about to get real about budgets, financial transparency, and that elusive ratio known as “overhead.”

In the simplest terms, The Overhead Myth is the persistent belief that nonprofits should—and could—run with minimal administrative and fundraising costs. When a charity or nonprofit organization shares its financials, the first line many donors check is how much of each donated dollar goes toward “programs” (the activities directly connected to the nonprofit’s mission) versus overhead, often broadly defined as administrative, fundraising, and operational expenses. Historically, donors were encouraged to favor organizations that boasted the lowest possible overhead percentages. The premise was simple, if a bit naïve: a lower overhead ratio supposedly meant more money went directly to helping people.

But things aren’t that simple in the real world. A nonprofit cannot function effectively without investing in staff, technology, training, office space, marketing, and other essentials that keep the organization running. You wouldn’t expect a school to produce stellar results without paying for decent facilities, updated textbooks, or professional development for teachers. The same goes for nonprofits. When nonprofits are starved of resources, they can’t serve their constituents as effectively as they might if they had the capital to invest in building a strong infrastructure.

The Overhead Myth is therefore not only misleading but can be downright harmful to nonprofits that need to grow, innovate, and adapt. Yet, it’s been a deeply entrenched concept for decades, shaping donor expectations and nonprofit practices alike.

The origins of The Overhead Myth can be traced to the rise of charity rating systems and watchdog organizations in the late 1990s and 2000s. As philanthropy grew more sophisticated, donors demanded more transparency and accountability. Organizations like the Better Business Bureau (BBB) Wise Giving Alliance, Charity Navigator, and Guidestar (now Candid) began evaluating nonprofits, and one of the most straightforward metrics to look at was the percentage of donor dollars spent on programs compared to operational costs.

Naturally, an easy way to appear efficient and responsible was to keep overhead costs as low as possible. Many nonprofits—eager to earn higher ratings and prove their trustworthiness—reduced their administrative expenses. This often meant underpaying staff, skimping on technology, and neglecting other operational aspects, all in the name of boosting that magical “program spending” ratio. Sadly, other organizations that simply couldn’t meaningfully spend less on overhead just lied about it and under-reported their overhead expenditures to make themselves look better.  Regardless of which move was made, over time, this practice grew into a dogma: “Low overhead is good. High overhead is bad.”

However, in the late 2000s and 2010s, a handful of nonprofits and experts started pushing back. They pointed out that overhead ratios, taken in isolation, are a deeply flawed way of measuring a nonprofit’s impact. The conversation really heated up in 2013, when the same leading watchdog organizations mentioned above—Charity Navigator, BBB Wise Giving Alliance, and Guidestar—issued an open letter (which we republished on this site at the time at the request of Guidestar) condemning the over-reliance on overhead ratios. They called for a broader look at each organization’s total impact, sustainability, and how effectively it pursues its mission. This joint statement was a watershed moment in the philanthropic sector.

But these groups didn’t start the conversation.  In fact, some could credibly argue that they fueled the fire of The Overhead Myth for years before they realized the error of their ratios.  Many people credit high-profile advocates like Dan Pallotta—author of Uncharitable and the popular TED Talk, “The Way We Think About Charity is Dead Wrong”—for shaking up the philanthropic community. As Pallotta famously said,

“We have a belief system that insists that nonprofits be desperately afraid of investing in their own growth.”

His words struck a chord, and suddenly, a voice was given to the idea that maybe overhead spending wasn’t the evil some had portrayed it to be.

After the 2013 letter—often referred to simply as “The Overhead Myth Letter”—the conversation around nonprofit overhead began to shift in earnest. Watchdog organizations and rating systems began revising their models. Some replaced the overhead ratio as the central measure of effectiveness with more nuanced approaches that emphasized outcomes, impact, and transparency. They recognized that a singular focus on overhead percentages is counterproductive.

Over time, more and more donors started hearing about the so-called “myth.” Foundations, too, became more aware of the need for robust operational infrastructure in the nonprofits they fund. Gradually, the philanthropic community began asking questions like:

1. What is the organization actually accomplishing?
2. Does it have a sustainable business model that can scale?
3. Is the nonprofit investing in staff training, efficient technologies, and effective fundraising?

These shifts signaled a willingness to see overhead in a new light—not as a necessary evil, but as a vital investment in the nonprofit’s ability to thrive and deliver on its mission. Still, old habits die hard. Many nonprofits continue to downplay or disguise overhead expenses, not out of deceitful intent, but because they worry about how donors might perceive them. That’s why the myth, though weakened, still lingers.

So if overhead is beneficial, why does the myth persist? Partly because it’s an easy storyline: donors want to be assured that their money directly impacts the cause. Numbers like “90% of every dollar goes to programs” might feel reassuring, even though such metrics can be overly simplistic—or even misleading. Additionally, there’s a fear factor: nonprofits worry that if they disclose higher overhead, donors will jump ship in favor of other charities.

But as the conversation evolves and more experts weigh in, the philanthropic sector is gradually realizing that overhead percentages don’t paint the whole picture. Like any investment, the key is transparency and accountability. If a nonprofit explains how overhead costs improve staff capacity, efficiency, and program outcomes, donors are often more than willing to support the organization. In fact, many donors are thrilled to know the organization takes its own capacity-building seriously—because it means the nonprofit is in it for the long haul.

Our opinion should be clear by now: overhead is not a bad word. In fact, overhead can empower nonprofits to be more impactful. Here are just a few ways that overhead spending helps organizations succeed:

1. Quality Staff and Retention – Great nonprofit work requires great people. If an organization can’t pay competitive wages, staff burnout and turnover skyrocket. Every time someone leaves, institutional knowledge is lost, and the organization has to invest more in hiring and training a replacement. A reasonable overhead budget that includes fair salaries not only keeps employees motivated and engaged but also ensures that the nonprofit retains the skilled professionals it needs to excel.
2. Professional Development – Industries change fast—nonprofits included. Whether it’s new research on best practices for community outreach or technology updates that can streamline operations, staff members need continuous training to stay sharp. Investing in professional development means employees can learn new skills that will ultimately benefit the people and causes the nonprofit serves. That’s overhead well spent.
3. Technology and Infrastructure – It’s hard to do modern work effectively on outdated software, spotty Wi-Fi, or ancient computers. Technology can streamline donor communications, enhance program delivery, and collect data that helps measure impact. Overhead spending that goes toward robust technology systems ultimately improves the nonprofit’s ability to serve its community.
4. Marketing and Communications – Even the most worthwhile cause in the world can’t attract support if no one knows it exists. Marketing and communications might be labeled “overhead,” but it’s what lets potential donors, volunteers, and beneficiaries learn about the organization’s mission. Clear, engaging, and strategic marketing can also shine a spotlight on the real impact of programs, helping donors see exactly where their contributions go.
5. Fundraising – Fundraising isn’t free. It often involves event planning, relationship-building, print or digital campaigns, and more. If nonprofits don’t invest in fundraising, they can’t generate the resources needed to survive. Skimping on fundraising costs can result in lower revenue and fewer resources to deliver programs.

You might be thinking, “Okay, I’m sold on the importance of overhead. But how do we convince donors and stakeholders?” Here are a few suggestions for nonprofits looking to change the conversation:

1. Be Transparent and Provide Context – Instead of simply reporting an overhead percentage, offer a narrative explaining where these funds go. Are you investing in a new CRM system that will allow you to track donor engagement more effectively? Share that story. Highlight the efficiencies gained and how it enables you to serve more people.
2. Leverage Data and Storytelling – Data is compelling. Show how a modest increase in overhead led to a significant increase in the number of people served, funds raised, or programs delivered. Pair this data with personal stories of beneficiaries or staff whose experiences have improved because of these investments.
3. Invite Donors to Witness the Impact – Rather than hide your operational processes, open the doors. Invite key donors or board members to see the new technology in action or meet the staff who have benefited from professional development. When donors see overhead in action, they’ll recognize its value firsthand.
4. Aim for Sustainability, Not Just Efficiency – Emphasize the importance of being around for the long haul. A short-term, shoestring approach might help you look good on paper this year, but it can undermine the organization’s stability and effectiveness in the future. Show how “overhead” investments are a roadmap to sustainability, ensuring your mission stands the test of time.
5. Advocate for a New Definition of Accountability – Accountability shouldn’t revolve around overhead ratios alone. Instead, accountability should focus on whether the nonprofit is achieving its stated goals and responsibly stewarding its resources toward tangible outcomes. Nonprofits can lead the charge by sharing thorough impact reports that explain both their successes and the operational investments required.