Try Not to Judge a Charity By Its Admin Costs Alone

Giving Compass’ Take:

• The author explains why it can be detrimental for donors to judge nonprofit organizations and charities on how they report their admin costs.

• Will more stories like these help change donor mindset?

• Read about the importance of having general operating funds.

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We kept overheads low, boasts Camila Batmanghelidjh in her book about how and why Kids Company, the charity she founded, collapsed in 2015.

Perhaps skimping on administrative costs was a false economy. In the book she also says the charity kept paper records for the 36,000 children and young adults it claimed to support, which were “stored in 80 cabinets.” It hardly sounds ideal.

Poor record-keeping was a significant factor in the charity’s collapse, according to a report by a committee of MPs last year, which decried “negligent” trustees who ignored repeated warnings about the organization’s financial health. The trustees condemned the report as “inaccurate.”

Now Ms. Batmanghelidjh has told her side of the story and her stance illustrates the thorny issue of charities and admin costs. A lot of pressure comes from donors who often judge charities on how little they spend on administration. There are important reasons why donors should not do this.

• First, in a good charity, all the money, including admin costs, is ultimately spent on charitable activities.
• Second, composition of a charity’s cost base is no indicator of its effectiveness. Charities in England and Wales must split their costs into three categories in their accounts: charitable activities, costs of raising funds and governance costs. This unhelpfully implies that managing oversight and raising funds are somehow separate from charitable activities. They are not.
• We should also consider the effect of volunteers. A charity whose workforce is mainly volunteers has an oddly small cost base. Nevertheless, it will pay for accounting services and identifying where its services are most needed. Precisely because the labour is free, the other costs (such as governance) dominate the cost base.

The fact that so many donors use administrative costs as a measure shows that many want a way to compare charities.

If someone produced decent comparators they would probably be used widely and act as great leverage for whoever funded them. It is a huge opportunity for a dedicated philanthropist to consider.

Read the full article about trying not to judge charities by admin costs from Giving Evidence.