Does Overhead Spending Affect Fiscal Performance of Nonprofits?

Overhead spending has been used to view nonprofits for decades. Donors consider overhead cost as extra “price” of a donation’s impact and would like to apply limits on overhead costs, thus improving impact ratios. However, nonprofit practitioners and researchers claim that constraints on overhead spending may hinder organizational development. This paper aims to analyze whether overhead spending affects positive fiscal performance. The research employs the NCCS (National Center for Charitable Statistics) database containing all the data reported on IRS 990 Forms from 1,397 arts, culture and humanities organizations from 2000 to 2003. This paper uses two regression models to evaluate the lagged effect of overhead spending on the change of net assets and the lagged effect of net assets on overhead spending, based on selective samples from the initial database. The results show a complex relationship between overhead spending and the change of net assets. The first model detects that less overhead spending leads to greater change of net assets in the following year, but the second model suggests more net assets leads to more overhead spending in the next year. It’s a feedback loop rather than a one direction relationship. In addition, results from the first model show that the overhead ratio, (not spending) doesn’t matter for any change of net assets in the following year, which is consistent with the argument by nonprofit managers. Total revenue and total assets are positively related to the change of net assets, which means the growth and size of the organization relates to fiscal performance as well. Sample selection has effect, but not a lot, on finding significant results. The author recommends that nonprofits need to strike a balance between reducing overhead and spending for growth, and that donors not look at the overhead ratio in terms of fiscal performance