It’s probably a question we get asked more than any other – “What are your administration costs?”
And everytime we get asked that question, a fairy dies. Okay, maybe not – but it is a little frustrating.
Mainly because we’ve all been misinformed when it comes to administration costs. Somehow, we’ve been led to believe that if a charity has low administration costs, it’s a sign that a charity is doing good work.
Unfortunately, in most cases, the opposite is true.
Here are three secrets that you’ve probably never been told about charities’ administration costs.
1. Administration costs are easily manipulated through accounting practices.
There is no ‘one way’ to figure out how to calculate a charity’s administration cost. Every charity has a different approach. For example, when we pay $2000 for Volunteer Insurance, we automatically allocate that to ‘administration’ expenses. However, another charity may take that $2000 and allocate to 3 areas. Perhaps 50% will be allocated to administration, 25% to fundraising, and 25% to program costs. Why? Well, most charities can’t run without their volunteers – and volunteers support fundraising, programs AND administration.
Who is right? Well, we both are. There is no set way to work out administration expenses, so the maths behind each admin percentage is different. Essentially, charities can make their administration costs look however they want them to look.
2. Administration costs tell you NOTHING about the quality of work being delivered on the ground.
Studies have shown that charities who invest MORE in administration perform better than charities who boast about low admin costs. I’ve seen the impact of this first hand. I’ve seen charities who promise that 100% of your money goes to the cause, and they rely solely on volunteers to run the organisation. This is not a sustainable business model – and there is a lack of systems and support because of this. How can you know that your dollar is making a difference, if no money is spent on systems that monitor the impact of your donation?
“The clear implication is that donors shouldn’t favour charities with low administration costs. The empirical evidence provided here shows that they’re likely to be low performers.”
3. Like any business, waste WILL happen – but good charities do what they can to avoid it.
Just like any for-profit business – charities will make mistakes. There are times when we spend money on things we shouldn’t have. Last year, we made the mistake of ordering 2000 stickers for our Do It In A Dress campaign. Our sales forecasts were wrong, so we ended up with about 1000 stickers left over at the end of the campaign. Unfortunately they all have “2012” on them, so we can’t reuse them this year. It sucks, and it was a waste of money. But we learnt from it. This year we’re making sure that we NEVER date stamp any of our merchandise so we can reuse it year after year.
EVERY charity will make mistakes like this. Good charities will nip problems like this in the bud as fast as they can.
There is a fantastic TED talk (which went viral), that sums up everything that is ‘wrong’ with asking about administration costs. Watch it – it will be the best 20 minutes you spend all day, promise.
And look, there are dodgy charities out there who might not be doing the right thing with your money. But chances are, you’re not going to be able to figure this out by simply asking “What are your administration costs?” – as I mentioned earlier, this is easily manipulated through accounting practices, so let’s start asking some different questions:
1. Are you a registered charity in Australia? (Or your country)
2. Is your charity overseen by a Board of Directors? If so, who are they?
3. Are your financial accounts audited? (External audits are better)
4. Can I have a copy of your audited financial statements?
5. What systems do you have in place to track the impact of your programs on the ground?
6. What are some mistakes you’ve made recently and what did you do to overcome them?
At the end of the day, you’ve got to trust your gut. If it feels dodgy, then don’t donate – and if you want to take it a step further, then tell the charity WHY they missed out on your donation. If they’re anything like us, they’ll love the feedback, and do what they can to resolve it.