Little Known Secret to Improve a Nonprofit’s Expense-to-Overhead Ratio

Before writing a check, many donors will access resources like nonprofit rating services to review the organization’s financials.   In particular, they will want to see the organization’s expense-to-overhead ratio to assure their dollars will go to the mission, rather than salaries or rent.   A little-known secret for improving that ratio is by a having the nonprofit distribute a Public Service Announcement (PSA) to broadcasters asking for donated media space to air the PSA.

To learn how a PSA helps, it’s important to first understand the basics.

When a TV or radio station airs a nonprofit’s PSA, it is donating the income it would have earned had they sold the time to a paying advertiser.  This donation is known as a Gift-In-Kind contribution.

According to Generally Accepted Accounting Principles (GAAP), the nonprofit’s CFO is required to record the donated media as both revenue and also expense.  While it would seem the two transactions offset each other, because the donated media increases revenue and also increases cause-related expenditures, the ratio of cause-related expenses changes when a gift-in-kind is recorded.

Here’s an example showing how an organization’s ratio significantly shifts for the better when the nonprofit’s PSA campaign has earned $5 million of donated media.

Per GAAP rules, the income from the donated media is added as both income and program expense   

PSAs offer a win-win for a nonprofit.  First is the benefit of having mass awareness generated by all the airings from stations across the country, but also, since a typical PSA can generate many millions of dollars in donated media over the course of the year, there will be a very large donation to record.

To learn how the media value from a PSA campaign can help your organization, or for a free evaluation to make sure your current campaign’s donated media is being reported according to GAAP rules, contact us.

Hot Topic: According a Giving USA Foundation report, in spite of the pandemic charity donations in 2020 soared over 2019 levels, reaching an estimated $471 billion.  The needs brought about by COVID  prompted estates, foundations and wealthier households less financially impacted, to donate more.