This note discusses why low overhead may not be a good thing for a charity and what is appropriate.
I am occasionally asked ‘what is an appropriate amount for administration and fundraising’, what is commonly referred to as “overhead”. I do not like the term “overhead” – it has a slightly pejorative sound to it which is unfair as overhead is generally necessary for an organization to run well and be sustainable. Some people use the 80/20 rule because the Canadian disbursement quota (DQ) requires charities in most cases to spend 80% of the amount receipted by the charity in the previous year on charitable activities in the following year. The 80/20 rule is very misleading in terms of overhead as many charities receipt little of their donations and therefore can legally spend much less than 80% of their revenue in the previous year on the subsequent year’s activities and still be compliant with the disbursement quota. In fact many charities could take in a lot, and spend nothing, and still be compliant with their disbursement quota obligations.
Some difficult ‘philanthropists’ don’t really care about the costs of running a charity, as distinct from the cost of implementing a particular project, they just insist that none of ‘their’ donation should go to overhead – that charade only works if there are enough people who make undesignated gifts that will pay for the operation of the charity. Yes, it is possible for a charity to have 100% of their funds going to charitable programs if it is going to bury the real costs of administration and fundraising in an affiliated non-profit or a for-profit corporation etc. While the T3010 is public, tax returns for non-profits and for-profits are not. At that point, in my mind the idea that 100% of the funds are going to charitable programs is purely a marketing gimmick and I would avoid people or charities who make such claims. If all donors and funders required that 100% of their funds go to programming costs and no money is spent on administration, fundraising, governance, and all the other things keeping charities alive then most charities would not exist in a year or two.
Some groups, especially small ethnic or religious groups, can keep fundraising and admin costs very low (1-5% range) but they are sometimes all volunteer groups that work within one small community and there are sometimes issues of transparency and accountability and the sustainability of the organization if the volunteers curtail their efforts. They may be doing a good job or a poor job – but sometimes you have no idea.
In my experience, transparency and accountability are expensive. Putting out an annual report takes time and money. Communication with stakeholders and other interested groups costs money. Having a website costs money. Having proper financial controls costs money. Regularly monitoring activities and evaluating those activities is more expensive than dispensing with the monitoring and evaluation and just doing the program in perpetuity because you have always done so. Having an office with a proper filing system costs money. It is cheaper to have records kept in a basement and it may work until there is a sewage backup or basement flood. Trying to have a charity operate within the legal and accounting rules is more expensive than just ignoring them. Avoiding almost all legal and accounting fees may seem like a good idea until there is a far bigger and more expensive problem or risk/liability that arises needlessly that requires an expensive solution. Paying people a living wage is more expensive than exploiting them. With such a large part of our society working for non-profits and charities if the jobs would not compensate people properly ten percent of our population would be worse off. Good corporate governance such as regular board meetings costs money. I recently was involved in an organization that had been around for over 20 years and had never had an annual members meeting. They were not aware that they needed to have annual meetings. Think of all the money they ‘saved’. People are concerned with privacy. Putting in place privacy protections and security of computer networks costs money although poor privacy hurts everyone. If you want properly run organizations there are costs associated with that. It is easy to cut costs but there is usually an associated trade off.
If one is a cynic one could say that it is simple to reduce overhead for non-profits and charities in Canada – fire the people checking that funds are being spent appropriately; don’t provide your employees with the resources they need to efficiently do their jobs; pay your employees and contractors a below living wage standard; get rid of all insurance; don’t replace ageing or defective equipment; use exploitative and manipulative fundraising techniques that in the short term may yield results even if undermining the sector; hide expenses in affiliated entities or donor entities; and of course massage the financial numbers if those ideas don’t yield enough results. None of these are desirable and one needs to be careful what one wishes for.
I was recently at a conference on NGOs and attended a lecture on measurement and effectiveness of charities. The presenter pulled from Guidestar two charities that operate in the same sector and the same city – charity “A” which spent 25% on overheads and charity “B” which spent 10% on overhead. The presenter asked the audience if they were a donor or a funder which charity they would support. Almost everyone raised their hand to support Charity B, except for myself who raised my hand to support charity “A” with the high overhead. The presenter looked towards me and asked me to explain myself. I said jokingly that in all likelihood the only real difference between charities “A” and “B” is that charity “B” spends more on accountants and takes more time to massage the books to make their financial statements look better. Everyone laughed. The next slide from the presenter was more information on charities “A” and “B” and how the low overhead charity was not nearly as effective, had no reserves, had low staff morale, was in financial trouble and was considering its options for merger or being wound up. Now which charity are you going to support?
I guess I should try and answer the question I raised?
The CRA has come up with a grid for evaluating fundraising expenses based on the percentage of “fundraising costs” to “fundraising revenue”. The evaluation grid provides:
Ratio of fundraising cost/fundraising revenue in fiscal period
Rarely acceptable: more than 70% (charity nets less than 30%)
Generally not acceptable: 50% to 70% (charity nets 30% to 50%)
Potentially not acceptable: 35.1% to 49.9% (charity nets 50.1% to 64.9%)
Generally acceptable: 20% to 35% (charity nets 65% to 80%)
Acceptable: less than 20% (charity nets more than 80%)
This is not an answer to my question as it only focuses on one of the “overhead” factors, namely fundraising and does not include administration. Many organizations have administration that can cost between 5-15%. That is over and above the grid that CRA is discussing.
As well we all know that charities are not all the same. Some are big, some small, some rural and some urban, some work locally, others nationally or internationally, some deal with high profile and sympathetic issues like children’s health and other deal with important but lower profile issues, some are newly setup, others have been around for a long time and have faithful supporters. The Charities missions differ. Some charities are umbrella organizations or foundations or regrant funds and do not directly carry out charitable activities and may have far lower overhead.
In addition to these differences there is not as much consistency in accounting standards relating to charities as there should be. This can result in more difference than any other factor. Two charities could be treating the same expense very differently. I was looking at the 2006 T3010 data and it is interesting to note that most charities spent $0 on professional services which includes accounting and legal. About 60,000 of the 82,000 charities have zero fundraising costs (line 5020). About 32,000 charities have no management and administration expenditures (line 5010).
Some charities may be able to have overhead of 10-15 percent, but many will quite legitimately have higher overhead expenses more in the range of 20-35%. You need to look closely at the individual charity, how it is operating and what it is spending money on. One charity with 20% overhead maybe should be spending 25% while another charity with 15% overhead probably should be at 10%.
We should also remember that reasonable overhead begins with us. If we donate to a charity without even being solicited then we are helping keep their overhead down. If we make a few big donations, instead of a large number of small donations we are also reducing the cost of processing the donations. If we are demanding and make all sorts of requests of charities to send us information that we could just as easily find on their website then we are wasting their resources and increasing their overhead. If the only way we support charities is by going to elaborate fundraising dinners and special events then we should not be surprised that a charity has high fundraising costs.
Diversification of Funding
Many charities rely on one or two donors or funders to provide the bulk of funding. For example, some international development organizations receive ½ or 2/3 of their funding from CIDA. When you look at the financial statement or T3010 it may look good because the costs of obtaining that funding may not be more than 10 or 20%. However, reliance on one or two donors can be calamitous to the charity’s programs if one of the donors or funders stops funding.
Also sometimes large donors make large demands on charities that sometime undercut the ability of the charity to do what charities do best - be nimble and creative in solving problems.
Many charities in this position are interested in diversifying their sources of revenue and yes diversification comes with a cost. Many charities are trying to ‘invest’ in getting donors with a hope that there will down the line be a pay off. Some types of fundraising costs 50c on the dollar. But over a ten year period perhaps the cost is only 10c on the dollar. Government money may be cheaper to get than the $50 donations but government funds come with strings attached and as governments change their priorities they may not be prepared to fund your program.
Different types of fundraising require different resources and have different costs associated with them. One of the reasons I like planned giving – especially bequests, is that the costs of obtaining funds through bequests are often in the 1-5% range compared to other types of much more expensive fundraising like telemarketing or special events. Many charities need to sit down and think about how over the next few years they can do more in the low cost area (eg. bequests and major gifts) and less in the high cost areas.
Legitimate Ways to Reduce Costs.
There are useful ways for charities to keep fundraising and overhead costs down. One of those ways is to use more volunteers. Many organizations have trouble attracting volunteers. People are more busy today and many are reluctant to volunteer. But the feeling I get is that many charities increasingly prefer to use paid staff people for many of tasks that they have which is unfortunate. Effective use of volunteers is one of the best ways to cut costs.
Excessive compensation of senior executives at charities is sometimes discussed but I have not seen many instances where there is actually a problem in Canada. The US is a different story and as in other cases should not be a model to follow. When a CEO earns $175,000 and his organization has revenue of over 300 million dollars I think that the organization is getting good value for the money. Private corporations would pay many times that amount to earn similar ‘revenue’.
The effective use of technology can dramatically increase the scope and reach of an organization and the ability to raise funds. While there are many high priced technology vendors out there ready to sell you an expensive and overpriced ‘solution’, it does not take an Einstein to realize that a lot of the benefits of technology can be gained for free or only a few thousand dollars. If you, and your charity’s strength is not technology, and I would say most charities fit into this category, an inexpensive way to get your feet wet is to find a staff person who has a son or daughter who is between the ages 14-18 and has a social life. Then talk to that person for an hour or two about their use of technology. That would be a good start.
The US Better Business Bureau suggests charities should spend about 35% or less on fundraising and administration. That seems like a reasonable amount for many organizations.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.