Every year, around tax time, some well-meaning website publishes a list of Australian charities ranked by how little they spend on administration. The implicit message: the less a charity spends on overhead, the better it is. Give your money to the ones with the lowest admin ratios.

This idea is not just wrong. It’s actively harmful, and I’m tired of watching good organisations contort themselves to meet an impossible and counterproductive standard.

The overhead myth explained

The overhead myth goes like this: charities should spend as much as possible on “programs” and as little as possible on “administration.” A charity that spends 90% of its income on programs is better than one that spends 70%. The highest possible percentage going to the cause equals the most effective charity.

It sounds intuitive. It’s also complete nonsense.

Here’s why. “Administration” includes things like financial management, strategic planning, IT systems, staff development, fundraising, and evaluation. These aren’t luxuries. They’re the things that allow an organisation to operate effectively, manage risk, and actually deliver on its mission.

A charity with no investment in financial management is a charity at risk of fraud and mismanagement. A charity with no investment in IT is a charity that can’t track its outcomes or communicate with its supporters. A charity with no investment in staff development is a charity that burns through employees and loses institutional knowledge.

Cutting administration doesn’t make a charity more effective. It makes it more fragile.

The real-world damage

The overhead obsession creates several perverse outcomes.

Organisations hide their true costs. When donors judge charities by their admin ratio, charities respond by reclassifying expenses. Staff who spend half their time on program delivery and half on administration get classified as 100% program. Shared costs get allocated entirely to programs. The reported admin ratio goes down, but the actual spending doesn’t change.

Investment in quality is punished. A charity that invests in a proper impact evaluation will show higher administration costs than one that doesn’t. A charity that invests in a good CRM to manage its donor relationships will show higher administration costs than one using spreadsheets. In both cases, the investment makes the organisation more effective, but the overhead metric penalises it.

Fundraising is stigmatised. Fundraising is a cost that appears in the overhead category. But fundraising is how charities generate the revenue to fund their programs. A charity that invests $1 in fundraising and generates $5 in donations is making a great return. But the overhead-obsessed donor sees the $1 as waste.

Staff are underpaid. The pressure to minimise overhead translates directly into pressure to pay staff as little as possible. This contributes to the chronic underpayment of nonprofit workers, makes it harder to attract and retain talent, and ultimately reduces the sector’s effectiveness.

What you should look at instead

If overhead ratio is a bad metric, what should donors use? Here are better questions to ask about a charity.

What outcomes does it achieve? Not what activities it runs, but what actually changes for the people it serves. A charity that can demonstrate clear evidence of impact is worth supporting regardless of its admin ratio.

How does it measure and report its impact? Is the organisation honest about its results, including its failures? Does it use its data to improve? Organisations that invest in evaluation (which costs money and shows up as overhead) tend to be more effective.

Is it financially sustainable? Does the organisation have diversified revenue, adequate reserves, and a credible financial plan? An organisation that’s financially fragile is a risky bet, regardless of how low its overhead ratio is.

How does it treat its staff? Are employees paid fairly? Is there investment in professional development? Is turnover manageable? An organisation that treats its staff well is more likely to deliver quality services.

Is the governance strong? Is there an engaged, skilled board that provides genuine oversight? Good governance is the best protection against mismanagement.

The evidence is clear

Multiple studies, including research from the Stanford Social Innovation Review, the Overhead Myth consortium (which includes GuideStar, Charity Navigator, and the BBB Wise Giving Alliance), and various Australian researchers, have concluded that overhead ratio is not a meaningful indicator of charity effectiveness.

The organisations that have signed the Overhead Myth letter in the US include some of the most respected names in philanthropy. In Australia, Philanthropy Australia and the Centre for Social Impact have both argued against using overhead as a primary measure of charity quality.

The evidence is clear. The myth persists anyway.

A challenge to donors

If you’re an Australian donor who checks admin ratios before giving, I’d challenge you to try a different approach. Pick a cause you care about. Find an organisation working on that cause with a clear track record of results. Read their annual report — not just the financials, but the program outcomes. Talk to them about what they’re trying to achieve and how they’ll know if they’ve succeeded.

Then give them unrestricted funding and trust them to spend it where it’s needed most. That’s the kind of giving that actually changes things.

The overhead myth has cost the Australian nonprofit sector millions of dollars in foregone investment, suppressed salaries, and organisational fragility. It’s time to let it go.