The Australian Charities and Not For Profits Commission has published an article on the necessity of administratie costs and the diversity of ratios between admin and direct action cossts in various charities.
The article reads a bit like an email rant that slowly evolved into an article. But it's pretty good.
In summary, their advice is:
Low administration costs alone do not necessarily indicate an effective or well-run charity. Similarly, higher administration costs do not necessarily indicate that a charity is ineffective or poorly-run. There are inefficient charities with poor outcomes that report low administration costs, and there are charities that spend more on administration and have efficient programs and successful outcomes. In deciding which charities to support, you should look at the work that charities do and the impact that they have.
It helpfully points out that the simple, obvious fact different charities might report what things count as 'admin' different. Do you call someone an 'administrator' or 'project overseer'? Are the related costs to travel (like insurance) an 'admin overhead' or part of 'travel to the site of the project'?
In fact they even say :
All charities incur administration costs. Even small volunteer-led charities that employ no staff and have no property will incur costs, for example simple things such as stationery or travel expenses.
Charities that promise “every dollar will go to X” are not helping the sector or the public to understand these matters.
Later on they explain how there are all sorts of factors that affect how large the overheads are:
- Charity size: some charities are big with extensive programs and operations, and the related economies of scale while others are smaller with narrower focuses;
- Charity location: some charities operate in low-cost areas, while others are located in more expensive cities; some charities operate nationally or internationally, while others operate in a single location;
- Charitable purposes: some charities work with high profile or popular causes and can attract funds easily, whereas others are focussed on causes with lower profiles and need to work harder on fundraising and awareness;
- Charity life-cycle: some charities are new and have a lot of start-up costs, and others have been around for a long time with established processes and a strong base of supporters and donors;
- Charity activities: some charities engage in direct charitable work and incur a range of costs, while others act as grant-making or fundraising bodies which distribute funds and do not engage in direct work.
Using ratios or percentages of administration costs as a point of comparison is unreliable as they don’t indicate the extent to which a charity is achieving results and making a difference in the community.
A very helpful article to think through the issues involved, and help explain them to others!
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