Why is the measure of a well run charity set at zero percent administration costs?
It is common for philanthropic investors to consider administrative costs when evaluating a potential organisation for funding. But is this a useful measure? The answer is perhaps, depending on the circumstances.
Let’s consider what low administration costs look like in the NFP sector.
Salaries
In the labour market, an experienced, capable employee will be more expensive for an employer than a less experienced person. Consider, what benefit does a charity have in hiring a less qualified person to run their organisation, and how will that impact on its effectiveness?
Sometimes, donors can believe that a person working for a charity should discount their asking price, which is wonderful for those who can afford to do so, such as late-career professionals who have achieved enough personal wealth to allow such a decision, however the majority of the workforce has the expectation to be paid what they are worth. And as in so many things in life, one gets what one pays for.
That isn’t to say a charity needs to pay top dollar either. The government provides generous tax deductions for charity workers to equalise their pay with the commercial sector, which allows the NFP sector to be more competitive on costs.
Another option is for the charity to limit itself to one exceptional employee (often the founder) and survive on lower cost support staff to perform the rest of the functions. This can present long term risks to the organisation.
Overheads
Overheads are sometimes considered by the philanthropist in evaluating administrative spend. For example, rent. Is this expense reasonable for the organisation and its activities? Aspects for consideration include:
- Is the organisation located in an area with expensive rent?
- If they are in an expensive area, such as renting an office in the CBD, can they find subsidised rent or consider moving to another location?
- Does the organisation require specialist buildings or equipment; or to operate from a certain geographical region?
There is an important caveat here.
Do you have enough faith in the board and management of the company to respect that they will have asked themselves these questions and be operating as efficiently as possible? If you do not, see above (salaries) and consider how these two matters are related.
Your Investment
When delving into a charity’s expenditure, a philanthropist should consider whether your investigations are reasonable to the value of your gift. For example, if you were purchasing a pair of shoes from a shop, you are unlikely to factor the shop’s management principles into your purchasing decision. However if you are purchasing the shop itself, by all means ask these questions.
Determining what level of gift warrants such investigations is unique to each donor. A good measure to consider is the value, in time and resources for the recipient, of your enquiries. Are the same administration costs you are wary of, necessary for the organisation to administer grants such as yours? A grantmaker should also consider these principles when setting grant application and acquittal forms.
Conclusion
A well-run business should be lean on costs, and that means spending what is required for its most efficient operation.
For a philanthropist, this means striking a balance between having enough information to satisfy yourself that your gift will be well-utilised, without accidentally contributing to the problem. Fortunately, these considerations are born out of good intentions. With the right application it can work for both the charity and the philanthropist.
Contact us to help with your due-diligence, or to review your current practices.
