Some might say I’m contrarian. Some might be right. In keeping with what some people think, try this on:

• Charities need more debt.
• Less revenue diversification.
• Less leanness, meaning bigger reserves.
• Higher overhead.

That runs directly against what the rating agencies (e.g. Charity Navigator) reward, their implicit model is clean balance sheets, diversified revenue, low overhead, and operational “efficiency.”  Follow that playbook and you will almost certainly get a high rating.

You will also constrain your ability to grow.

No one starts a charity thinking the goal is to save the world by satisfying the regulator’s view of fiscal propriety.  The goal is impact, yet the system often steers organizations toward caution, fragmentation, and underinvestment.

There’s data behind this, researchers looked at roughly 130,000 charities over a 30-year period using IRS data. The patterns are consistent and uncomfortable for conventional wisdom.

• Higher overhead leads to about 15 percent more program spending over ten years. The early years look worse, which is exactly why most organizations avoid it. But over time, the investment compounds and reverses the initial dip. Minimizing fundraising ratios feels efficient, but it actually depresses revenue generation and, by extension, program spend.
• Less revenue diversification leads to about 17 percent more program spending over ten years. Trying to be good at individual giving, grants, events, corporate partnerships, and earned revenue at the same time spreads organizations thin. Most charities are not large enough to do all of that well.  Focus beats fragmentation.
• Higher reserves, above the median, lead to roughly 32 percent more program spending. Yes, the short-term programmatic effect is negative, it has to be since you’re holding back resources but that retained capital is what allows you to expand capacity over time instead of operating at the edge every year.  The sector has a split personality here. A small number of institutions hoard capital with no real deployment plan, they deserve scrutiny. But most organizations are on the other extreme, chronically underinvesting in themselves in the name of virtue.
• Debt shows a similar pattern, above-median interest expense is associated with about 11 percent more program spending over ten years. Most charities avoid debt entirely and treat that as a sign of discipline. Meanwhile, the same board members making that decision use leverage in every other part of their lives. Homes, businesses, investments. Debt, when used well, is a tool for accelerating growth.

Heck, in finance, it isn’t even called debt, it’s called leverage, which is using other people’s money.  The uber rich do this as lifestyle.

So, I ask, is the system optimizing for optics or outcomes?

Kevin