Don’t Choose a Charity Based on Administration Costs
Posted on June 11, 2010 at 11:03 am
Yesterday there was a flurry of twitter posts regarding the fact that charity: water advertises on their website:
100% of public donations directly fund water projects
The final outcome appears to be that charity: water uses other sources of funds to cover their administration costs. Unfortunately, advertising campaigns such as these make it appear that these expenses are a waste of money and increases the pressure on each charity to reduce or eliminate their own administration expenses. Here’s a repost of a previous article I wrote on why administration costs are important.
While it seems logical that the less a charity spends on administration the more of your donation reaches the people that need it the most, it’s not as simple as that. In reality the amount that a charity spends on administration costs is a meaningless and potentially harmful indicator.
The amount spent on administration is no indication of the quality of work
The percent spent on administration is no indication of the quality of work done by the organization, whether projects were successful, or if they were even necessary. Cheap programs are not necessarily better programs and can often be just the opposite.
What is recorded as administration can be manipulated both at the field level and the accounting level
Organizations can alter how money is spent to make it appear to be a program cost instead of administration. In Thailand I oversaw four programs working across six provinces. In each province we wanted to put all the programs together in one office to increase collaboration and share resources. If we paid for the office ourselves it would be considered an administrative costs. If we gave each program money to rent their own office it would be more expensive but would be considered program costs.
Organizations can assign percentages of staff time to either programs or administration. A staff member could have 90% of their salary recorded as a program cost and 10% assigned to administration. Gifts-in-kind (donated goods or services) can be overvalued to make it appear that an organization is providing more in programs for the same administrative cost.
The pressure to keep administration costs low can impact the type and quality of programs
Organizations may under-staff or under-resource programs.
A common problem after any relief operation is coordination. This is made even worse because most organizations do not hire people specifically to coordinate and share clear information with other agencies because they’re trying to keep their administration costs low. Often this falls onto the shoulder of someone already over burdened with their main job. In Thailand I ran an organization that tracked all aid organization programs to increase coordination and decrease duplication and gaps in aid. It was common to have to wait at least a month for clear information from an organization. In one case an international organization made us wait four months. The result was wasted funds as some people received far too much aid while others received far too little. People commonly complained that some children received multiple sponsorships while others received nothing, others took advantage of the lack of coordination to get boats or houses from multiple organizations.
Another real problem caused by under-staffing is the organization not spending enough time with the aid recipients to learn their real needs and work with them in developing the recovery projects. This is all too common a problem, as documented by the Listening Project in their issue paper Presence “Why being here matters”
Organization may give priority to projects with inherently low administration costs.
Some projects have inherently low administration costs such as construction projects – because of the high cost of building materials in relation to administration costs – and donated goods. This can lead to schools built or libraries stocked with books but both go unused because there is no money to hire teachers. In Thailand one organization tried to help the government hire more teachers, but they struggled to raise funds because teacher salaries were seen by donors as administration expenses.
Be wary of any program claiming extremely low administration Administration is a necessary part of aid projects. Organizations claiming that all of your money will go directly to the aid recipients either have a secondary source of funding, are expecting volunteers to cover administration costs out of their own pocket, or are not being honest with donors. When I spoke with staff in my state’s Consumer Protection Agency they said that one of the red flags that will trigger an investigation of a charitable organization is if it claims no fundraising expenses.
Meaningful financial indicators
Here are some things to look for instead of focusing on the percent spent on administration
Do they provide information on how much money was spent in each location (town, province, or country – depending on the size of the organization), do they provide detailed information on how much was spent on each type of assistance (livelihoods, agriculture, food aid), and do they provide detailed information on how much was spent on expense types (staffing, salaries for top executives, rent, transportation, trainings).
Look for a copy of the previous year’s financial audit/review. The rules governing whether or not a charity is required by law to have an independent financial audit varies by country. However, while they may not be required by law, it is good financial practice to have yearly external audits for large organizations and internal financial reviews for smaller organizations. Here’s information on how to read a financial audit.
If an aid organization doesn’t trust donors enough to share their financial information then why would donors trust the organization with their donation. Unless it’s an extreme case, the percent an organization spends on administration is meaningless, and the focus placed on low administration costs can do more harm than good.
Lies, White Lies, and Accounting Practices; Why nonprofit overheads don’t mean what you think they mean.
This 20 page book breaks down the myths surrounding nonprofit overhead. You will never think of nonprofits the same again.
For a better way to evaluate a charity try using The Charity Rater, developed by the author of this blog to walk donors through the process of evaluating a charity themselves.
The Worst (and Best) Way to Pick a Charity – Philanthropy Action’s introduction to a joint statement from five charity rating organizations on why overhead ratios are meaningless
The Worst Way to Pick a Charity – GiveWell’s introduction to the same joint statement
Which of these boasts is not like the other - GiveWell – Looks at aid organizations claims of low administration costs