Donors to a charity often like to see that substantially all of their contributions are funding the operating programs of that charity. Little if any of the contributions would go to administration and other overhead expenses.
The ratio of operating expenses to total expenses is a handy metric of efficiency. In some situations, a low operating-expense ratio can be a warning sign of wasteful expenditures — maybe even excess compensation to the executives of the charity. On the other hand, a charity that is expanding into additional sectors or locations may incur start-up expenses that are worthwhile, but result in a low operating-expense ratio for a period of years.
Federal Government contracts with charities now require at least 10 percent overhead expenses. The California Association of Nonprofits offers tips to implement that new regulation.
The Charity Defense Council defiantly proclaims that “low overhead is not the way the world gets changed.”
HT: Nonprofit Law Prof Blog