Low Overhead Costs Don't Mean a Charity is Effective

Low Overhead Costs and High Program Expenses Do Not Necessarily Mean a Charity is Using it’s Donations Effectively

Brian Angus and Recha Bergstrom, MD

 When evaluating a charity, many donors look for organizations that have low overhead costs and high program expenses. The idea is that charities should spend as much of their resources as possible on directly helping the people they serve. However, low overhead and high program expense claims can be misleading and don’t necessarily mean that the charity is effective.

Some charities will make a “100% to programs” claim. This term refers to charities that claim to spend 100% of their expenses on program activities, meaning that none of their expenses go towards administrative or fundraising costs. While this may seem like a great way to ensure that all of your donation goes towards helping people, it's not realistic. Charities need to invest in infrastructure and staff in order to deliver their programs effectively.

An example of a charity that claims to use 100% of donations for programs is Homeopaths Without Borders, a charity that aims to introduce homeopathy in areas where it either does not exist or is minimally available. While it might sound great that all of their donations go directly towards helping people, there is no quality evidence to suggest that Homeopaths Without Borders helps anyone. So, even if it were true that no donations were being used for any administrative purposes, all the donations would still be used inefficiently because there is little evidence to show that homeopathic medicine works.

 The “100% to programs” claim is also problematic because it may make good charities that are transparent about their finances seem less effective.

Charity:Water, a charity that aims to provide clean water to women and girls who would normally have to walk hours to get clean water, claims that 100% of public donations go towards funding clean water projects. However, private donors fund their overhead costs. To be fair to Charity: Water, they are deemed to be a rather effective charity, however the “100% to program” claim may be misleading to donors and cause them to think other charities are less effective.

So, what should donors look for instead of low overhead costs? The key is to look at a charity's impact. This means evaluating whether the charity is achieving its mission and making a real difference in the lives of the people it serves.

Let’s say Charity A takes 20% from every donation for overhead costs, but can save 500 lives per $100 donated. And let’s say Charity B takes 5% from every donation, but can only save 1 life per $100 donated. Even though Charity B has much lower overhead costs, you would have to donate $47,500 to Charity B in order to save as many lives as a $100 donation to Charity A.

The most effective charities can have a relatively low percentage of overhead costs compared to program expenses because they are very good at using donations efficiently. However, just because a charity has low overhead costs doesn’t inherently mean it is a good charity, and vice versa. A holistic approach must be taken when evaluating the efficacy of charities.