There are no rules that determine how much money a nonprofit organization can spend on management, general administration and fundraising. However, a nonprofit must disclose that information on Form 990 with its income tax return, which is public information. Charitable watchdog groups rate nonprofit charities based on the amount of money they spend on their core programs and services versus other expenses. A low rating from a watchdog group might discourage potential donors from giving to an organization.
Charity Navigator Ratings
Charity Navigator rates nonprofits based on the amount of money they spend on management and general expenses. A nonprofit scores a zero out of 10, the lowest possible score, if it spends 30 percent or more of its revenue on management. Spending 25 percent to 30 percent scores a 2.5; 20 percent to 25 percent is a 5; 15 percent to 20 percent scores a 7.5; and 10 percent to 15 percent gets the top score of 10.
Some types of nonprofits might be expected to have higher or lower management and administrative expenses than the norm. For example, expensive collections and property that needs to be kept up and expanded usually results in museums having higher than expected management and administrative expenses. Food banks, food pantries and other food distribution organizations should have lower management and administrative expenses because they don't deal in cash and there's relatively little overhead.
According to CharityWatch, spending up to 40 percent on fundraising, management and administration is reasonable for most nonprofits. However, spending 40 percent would earn the nonprofit a grade of "C." Nonprofits that CharityWatch regards as highly efficient earn a grade of "A." These organizations spend 25 percent or less of their budgets on fundraising, management and administration.
The website SeriousGivers places nonprofits into three groups: green zone, yellow zone and red zone. The red zone is for nonprofits that spend more than 50 percent on fundraising and management. The green zone is for nonprofits that spend between 20 percent and 30 percent. There are two yellow zones. The first is for nonprofits that spend between 40 and 50 percent. The second is for those that spend between zero and 20 percent on fundraising and management. SeriousGivers believes that extremely low spending deserves a second look because all nonprofits have necessary fundraising and management expenses.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.