In other walks of life curiosity about costs incurred in supporting the delivery of services is unusual. If we buy a cup of coffee, we don’t care how much the store manager gets paid because it is not relevant to the transaction. We are exchanging money for a beverage, if we don’t like the drink or find a cheaper one elsewhere we won’t repeat the transaction. We are indifferent to how the coffee provider spends our money.
Most charitable donations do not have such a clear outcome. After making them we may hear nothing further from the charity. If we do, it will typically be vague in terms of what has been achieved and suffer from positive bias, so we lack clarity on how effective they are. Enquiring about overhead expenses is a way of trying to fill the information gap and gather some data on the efficiency of the organisation but it is a flawed approach.
What really matters is effectiveness which is usually linked to the quality of management and information systems. Good managers aren’t cheap. Software that delivers accurate and relevant data can be expensive but is essential to identify what is working well and what needs improvement.
Independent research of US charities indicates that if there is any link at all between overhead spending and effectiveness then it is positive. Achieving more impact requires more spending but that doesn’t mean that all charities with high admin costs are highly effective. Undoubtedly there is a high level of waste in many organisations, particularly those that have little pressure on fundraising but simply looking at much of your donation is spent on front line services won’t be a reliable indicator.
Fundraising costs are a particularly sensitive subject since these are not contributing to the delivery of charitable services and so these do need to be kept under control. However, it’s not realistic to expect these to be zero for charities that raise funds from the public – there are inevitably costs associated with marketing, donor administration and reporting. As a very general guide we suggest that these should not exceed 15% of donations received.
The only reliable way to assess charity performance is from data that measures impact. Whilst this will usually be far from perfect, it does at least indicate that the charity recognises its importance, both for the use of funders and to help management make better decisions. If a charity is unable to provide this type of data you should investigate why.
For more ideas about how to find the best charities check out our top tips.