Beyond Overhead: How to Use Nonprofit Financial Data to Make Smarter Giving Decisions

For years, donors and nonprofit evaluators alike have relied on a seemingly straightforward number to guide their charitable giving: the overhead ratio. This metric, which measures how much a nonprofit spends on administration (such as rent, salaries, software licensing, etc.) compared to direct services and programming, has oversimplified nonprofit effectiveness and impact. 

If you are a donor who wants to give with passion and impact, it’s time to move beyond reductive and harmful evaluation practices and embrace a more nuanced and informed approach. Here’s how you can use nonprofit data to make a bigger impact.  

The Overhead Myth: Why it Falls Short  

Many donors approach giving with the intention of making the biggest impact with their dollar. At Giving Compass, we’re often asked how to find nonprofits that “give the largest percentage of their donation to the cause.” While donors are well meaning in their intentions, the hyperfocus on directing where dollars go gets in the way of the donors’ intention to maximize impact. This is because investments in nonprofit infrastructure are critical to supporting nonprofit programming. 

 A study from the Center on Nonprofits and Philanthropy at the Urban Institute and Indiana University found that inadequate infrastructure significantly compromises organizational effectiveness. Nonfunctioning equipment, lack of staff training, and software that couldn’t manage the organization’s caseload were prevalent among nonprofits trying to maximize “efficiency” with as few resources as possible. Nonprofits were captured in this starvation cycle, with donors and funders placing unrealistic expectations on nonprofit expenditures and nonprofits struggling to scale their impact without meaningful investments.  

This has meaningful impacts on staff retention and service quality, with 45% of nonprofit staff indicating that they will leave the sector within five years. Without the dedicated staff administering the programs, nonprofits are stifled in the amount of impact they can make. The data consistently shows that high-performing nonprofits need to increase their spending on evaluation, fundraising, strategic planning, and other infrastructure to scale their operations and ultimately serve more of the community. 

Reading Nonprofit Financials: What Matters Most? 

If overhead alone doesn’t tell the full story, what should donors look for? Financial diligence is a key aspect of Giving Compass’ vetting criteria. We evaluate every nonprofit’s IRS 990 financial statement for transparency, sustainability, and impact. Here are some of the financial indicators that we look for when assessing a nonprofit’s impact:  

1. Summary: Part 1 of the 990 is the most crucial part of the form; it provides a summary of any nonprofit that will give you clear insight into an organization’s mission, its revenue, expenses, and overall net assets.  

2. Positive Net Assets: Line 22 of the IRS 990 will show you an organization’s net assets. This figure, which simply subtracts its expenses from its revenue, is largely considered the standard for an organization’s health. We look for two consistent years of positive net assets, with no negative trends such as a rapid decline or negative assets.  

3. Highest Compensated Employees:  Part VII and Schedule J of the 990 will show donors the salaries of key staff. High salaries aren’t inherently good or bad, but we check to ensure that salaries are commensurate with an organization’s revenue size and in line with market standards.  

Beyond Financials: Defining Impact 

The IRS 990 is the only standardized metric for nonprofit reporting, but it does not capture an organization’s full scope and impact. Donors should look beyond the 990 to get a clear picture of how an organization is optimizing its performance. At Giving Compass, we go beyond the 990 and evaluate an organization’s website and digital footprint to understand its impact better.  

1. Mission Clarity: When assessing a nonprofit, first check its mission statement. Is it focused and specific? Is it aligned with your giving intentions? 

2. Theory of Change: Does an organization have a clear theory of change, that is, how they plan on making their mission a reality? Is the theory of change rooted in evidence based practices?  

3. Annual Reports: Does the organization publish an annual report, impact report, or other metrics to demonstrate how it’s serving its mission? 

4. Decision Makers: Does the organization have information about its key decision makers or how decisions are made? Is there information about leadership and board members?  

Guide to Good Impact:  

At Giving Compass, we believe that donors who know more do more. While financials and 990s are helpful tools in understanding a nonprofit’s health and impact, they don’t tell the full story. True impact comes from organizations that pair strong financial management with deep community connection, transparency, and a clear track record of outcomes.  

Ready to give smarter? Start exploring Giving Compass’ Guide to Good today, where you can find vetted causes that go beyond overhead ratios to prioritize equity, effectiveness, and real community impact.