It’s time to have a frank discussion about charities and their administrative and fundraising costs. Over the past decade, the increasing focus on a charity’s cost of doing business has forced the entire charitable sector to defend itself against a rash of naïve accusations.
While there is no doubt that a few bad apples have found their way into the sector, the fact remains that over 85,000 other charities are doing precisely the work that most of us admire: feeding the needy, housing the homeless, nursing the sick and educating the young. Why some choose to focus their energy on the rotten apples rather than the orchard of vibrant ones is, sadly, a product of our negative media culture.
Our charitable sector is perhaps our great country’s most valuable resource. It places human decency and kindness above all else. It is not surprising then that the charitable sector has reacted to the recent focus on its cost structure with politeness, diplomacy and tact. The sector has (correctly) pointed out that evaluating a charity’s fundraising cost ratio might very well reflect its fundraising efficiency, but may have little correlation to a charity’s ability to achieve its mission (that is, its impact on societal betterment). The problem is that measuring a charity’s impact is difficult and subjective, while measuring fundraising efficiency is relatively simple. In the final analysis, however, impact is really the only thing that truly matters.
I work for an investment management company (although admittedly, I’m no investment expert). When portfolio managers analyze companies, they look at a variety of factors before they decide to invest. First, they crunch the numbers from absolutely every angle. Second, they look at other less tangible factors – the company’s management team, its products and services, etc. Third, they look at the company’s secular context – its competitors, the industry in which it operates and even broader local and global economic inputs. In other words, their analysis is not just a simple numerical one but one that incorporates broader judgment.
For the sake of argument, let’s say our investment analysts are evaluating three companies:
| Coal Mining Company | Furniture Manufacturer | Software Developer | |
| Revenue* | $10,000,000 | $5,000,000 | $1,000,000 |
| Production Costs | $2,500,000 | $1,500,000 | $300,000 |
| Marketing Costs | $100,000 | $200,000 | $100,000 |
| Administration Costs | $400,000 | $300,000 | $100,000 |
| Total Costs | $3,000,000 | $2,000,000 | $500,000 |
| Net Profit | $7,000,000 | $3,000,000 | $500,000 |
| Cost Efficiency (Profit as a Percentage of Overall Revenue) | 70% | 60% | 50% |
*Note: It is recognized that these terms are not necessarily the ones used to describe the item in a company’s financial statement
I presented this scenario to a few of our highly sophisticated portfolio managers and asked them which company they would select as an investment. Not surprisingly, they had about 75 additional questions, some focusing on numbers, others focusing on more qualitative factors. At the end of the exercise, they told me they would invest in the company with the greatest promise. While the numbers are part of the analysis, they are understood in a broader context.
Let’s take a similar analysis and extend it to charities.
| Women’s Shelter | International Development Agency | Community College | |
| Revenue | $1,000,000 | $5,000,000 | $50,000,000 |
| Fundraising Costs | $50,000 | $500,000 | $2,500,000 |
| Administration Costs | $100,000 | $750,000 | $15,000,000 |
| Total Costs | $150,000 | $1,250,000 | $17,500,000 |
| “Profit” – (Funds left to deliver programs and services) | $850,000 | $3,750,000 | $32,500,000 |
| Cost Efficiency (Profit as a Percentage of Overall Revenue) | 85% | 75% | 65% |
I asked the same portfolio managers which charity would be more likely to attract their donation. They unanimously responded with a blank and befuddled stare. One asked me why he would donate to a community college when he never attended one. Another said he’d prefer to direct his donations within Canada rather than outside of the country. A third told me that she had volunteered at a shelter and would definitely choose it over the other two. There was no analysis – no focus on profit or efficiency. Their decision was a thoughtful one but it was based on personal values around philanthropy and volunteerism rather than on quantitative factors. The choice was a seemingly simple one – so I decided to make it more difficult.
| Women’s Shelter A | Women’s Shelter B | Women’s Shelter C | |
| Revenue | $1,000,000 | $1,000,000 | $1,000,000 |
| Fundraising Costs | $50,000 | $100,000 | $200,000 |
| Administration Costs | $100,000 | $150,000 | $100,000 |
| Total Costs | $150,000 | $250,000 | $300,000 |
| “Profit” – (Funds left to deliver programs and services) | $850,000 | $750,000 | $700,000 |
| Cost Efficiency (Profit as a Percentage of Overall Revenue) | 85% | 75% | 70% |
As donors and media consumers, we’ve been led to believe that Shelter A is “better” than Shelter B, which in turn is better than Shelter C. But our sophisticated portfolio managers are quite astute even on matters relating to philanthropy. More questions arose when I asked them which charity would be their preference.
- What communities do they serve?
- Do they all serve only women or women and children?
- How do they help these women acclimatize back to the community and find supportive housing?
- Do they provide both short- and long-term support systems?
- They also asked other numerical questions, especially around how these numbers trended with previous years
The focus on immediate fundraising and administrative costs virtually ignores answers to these important questions. If Shelter C is the only organization serving both women and children, shouldn’t that be important? If Shelter B were the only one serving your community, wouldn’t you choose that one over the others? Perhaps Shelter C wishes to purchase a newer, safer building, potentially increasing its fundraising costs. There are a countless other potential variables, all of which speak louder than a narrow focus on fundraising and administrative costs. A pure focus on the sector’s cost efficiency belittles the importance of charities and the work that they do.
Those that work closely with the charitable sector know that it doesn’t stand on a soapbox and shout about the wonderful work it does. It just isn’t the type. Instead, it does its job proudly and quietly, like your trusted colleague who always gets the job done quickly and properly with no fanfare. Perhaps charities need to respond more vociferously to those who diminish their importance by focusing primarily on administration and fundraising costs. Until then, they will be forced to defend themselves from those who devalue the importance of the entire sector.
26 Responses to “Canada’s charities deserve better”
Barbara Hodkin
You make some good points. Nonetheless, when I know of a charity whose administrators are making huge amounts of annual remuneration I will not donate to that charity.
•Richard Lundeen
Brad, thanks for this thoughtful commentary. It rings true for the selection each of us makes on which charities to donate to. One important angle that your commentary doesn’t address directly is the concern of many donors about use of external fundraising organizations such that (apparently) a relatively small percentage of donations reach the charity. I’d prefer that most of my charitable giving is applied directly to programs and services and not to paid as commissions to third party fundraising organizations.
•Steven Megannety
You have the criticism all wrong. Many of us criticize the simple fact that we have institutionalized poverty, hunger and fear. A career feeding the hungry in a place like Canada! That is the real tragedy here.
•Eunice Wonnacott
Could you develop a parallel assessment for regular giving to a Christian church, without considering the variation in teachings based on the denomination?
•Lee
Brilliant, Bravo, Kudos and thank you.
•maureen mccall
As wonderful as giving is………here are the facts from a previously middle class canadian
•I take home “LESS” money now than 20 years ago
The many levels of government have shrunk our tax incentives for giving – unlike the U.S. and other countries
The many levels of government have downloaded many services which we the taxpayer should be funding through our taxes not charities
The many levels of government have continued to raise our taxes/property taxes/utilities etc. etc. etc. to the point that there is NO MONEY left even if we wanted to help
Before I donate I check out the charity to see “WHAT THE WORKERS AND ADMINISTRATION RAKE OFF THE TOP” when I see small charities giving their head people……..wages way above what I make……….I do not donate….when I see charities like the United Way paying wages way beyond and above the private sector …. I do not donate.
I have to go to work every day ………and I only wish I could give myself the kind of wages some of the Charitable Organizations believe if fair for themselves.
That IS THE PROBLEM……….we the ignorant masses can now acquire the data we need to make decisions on charitable giving……….and it is not just a few bad apples……small/medium/large charities have the ability to decide who gets paid and how much………..
The fighting for charitable dollars has become epidemic…..I cannot go one day without being bombarded by numerous charities…….I am fatigued/tired/and sick off the big charities spending “billions” of donated dollars to pull in more to their organization at the expense of the smaller grassroots local charities (that I believe do the most because they are on the ground)………….
Am I wrong in anything I have said………
Josie Farrar
I give to charities both in and outside Canada. My giving revolves around a very simple formula: do these charities send me gimmicks: pens, note pads, cards, stickers even nickels? If they do, they do not get my donation. I cannot believe that all the waste is not recognized by the government and banned. We should not need to be given “free gifts” . We are giving with our hearts and minds. We are living in a world of excess and a world of dire need. Let us reduce our own footprint by lobbying to get rid of these needless and resource heavy gifts. Unwanted “gifts” are hard on the environment and produce no good for the people so needing our help. Thanks.
•Ruth Silverman
I agree. I have recently become involved in the Living Wage Campaign http://www.livingwagecanada.ca/ and found out that some charities including the Canadian Cancer Society and the United Way (at least the Lower Mainland United Way) are pioneering Living Wage employers. Workers have the right to make a living wage, whether they work in the for-profit or not-for-profit sector, so if this raises charities’ administrative expenses, so be it. I used to be concerned about charities with higher administrative costs, but I no longer am, so long as it is a reputable charity.
•Jeffrey Freedman
Hi,
Your post reminded me of a podcast from Econtalk – http://www.econtalk.org/archives/2013/06/pallotta_on_cha.html
I think that one of the big issues regarding charities is how effective they are in actually helping to solve whatever problem it is that they were set up to solve. No question that this would be a very difficult metric to establish but if you make a donation to a charity, you really do want to make sure that it is going towards helping solve the problem.
•Philip Gross
One charity I volunteered at was faced with the consequences of a Mike Harris victory some years ago. With potential funding losses facing it I did an analysis that demonstrated clearly that the work of the charity SAVED a NET of $100,000,000 over costs for the Province over the next 65 years based on lifting some 125 young single mothers out of poverty. That is “EFFECTIVENESS”. Please feel free to contact me, I have several experiences with Canadian charities both before and after my retirement in 1993, and many opinions I would share.
•B urt Napier
all that said, data is a critical resource and if managed better could easily improve my concerns about fund raising costs – when giving to the many charities we select, one of my criteria is the endless mail I receive requesting donations, and, with the mail the crap and personalized materials that accompany them. I have often asked them not to send this material [using funds I intended for a specific need for further fundraising]. if they persist, I stop supporting them. why would it be that difficult to have a flag / field that indicates not to produce this garbage for specific donors. Mail, paper, address labels, pens, etc. are expensive and when not wanted, leave a bad impression of spending and money management
•am I the only one?
Susan Strong
Thank you for the thought provoking editorial. I have researched the charities I donate to on a regular basis. I understand totally that there is an administrative cost to managing a charity but I take great exception when the top administrative officers are making hundreds of thousands dollars or more – I feel strongly that they are working I the wrong place and have withdrawn my support. Being transparent means the charity should not only upfront identify the percentage of funds going to administration but disclose the CEOs salary and benefits.
•Brenda
Thank you for that…..this puts the whole issue in a different light, one that I hadn’t thought about. Most of the negative I have heard focuses primarily on the Leaders salary and the total % that makes it to the actual charitable work, both of which are a relatively small part of the equation. You do have to pay for top talent, without which your end result will be diminished.
•Bob McInnis
Not only does the single-mindedness of cost-efficiency measures reduce accountability to accounting, it also neglects the consideration of impact. Analysis of percentages ( admin/expenses, fd/revenue, outputs/donor$) is a great starting place for the conversation but we really need to figure out how to invest where the greatest promise of impact arises.
Not all use of ‘profit’ is equal. Some well intended programs have significant side effects and some actually entrench the very issue they are attempting to resolve. Should that be rewarded with investment?
Thanks for promoting the conversation. I look forward to comments from others.
•Sue Khazaie
Thank you for this analysis, and articulate defense of charities. We need to find ways to permeate Canadian thinking. Has the article been submitted as an editorial piece to national newspapers?
•Thank you again for these thoughts.
Allison Mackay
While its true that charities can’t be judged solely on the numbers, nobody wants their money to end up at an outfit that overpays its management team or self promotes more than it actually works. Eg. I like War Child because they focus on supporting local groups already operating in the countries they focus on. Beyond the money savings of not shipping a lot of people and things around, this helps maintain dedicated and qualified personnel who will hopefully work on locally after WC’s involvement is ended. That even your professional bean counters had so many questions beyond the numbers does say a lot about why we give and who we give to.
•Tim Burton
Many valuable observations and some very valid points. Nevertheless, one of the criteria I will continue to use in determining my personal donations is the ratio of fundraising costs to funds actually raised. Administrative and operating costs are another matter as these will reflect the services a charitable organization provides : other things being equal, it will cost more to operate a women’s shelter than to raise charitable funds for a medical research organization.
•Joanne Lloyd
The article made me take another look! I was also very impressed and proud (as I’m sure his parents must be!) to learn that young people like Brad Offman are immersing themselves in helping to create a more loving world, and making Canada proud.
•J. Klassen
I appreciate this thoughtful well-written article.
•Lorna Visser, Principal, Carmanah Strategies
Precisely, Brad. This is the article I wish I had written. I talk about this in my fundraising workshops; when I reassure people in the charitable sector that they are MORE efficient with funds and have lower overhead than most businesses, the relief is palpable. Thank you for this excellent review. – Lorna Visser, Principal, Carmanah Strategies
•Tricia O'Malley
Excellent article! Why people focus on inputs rather than outcomes has always bewildered me. It would be great if you could get it published on the op-ed page of a major newspaper. But it is not just the media that cause ill-informed comment and the focus on two virtually meanless statistics. A big part of the problem is the CRA, which is apparently just launching a special audit focus on the sector. So now some of the administrative costs people (including CRA) don’t like will be incurred to help the auditors and respond to assessments.
•Jason Shine
Thanks for highlighting an issue of charities are described and marketed, and suggesting a practical application of the need for a more nuanced approach to the issue. I appreciate your wisdom and your candor.
•David Cox
Brad, now do the same story but let’s manipulate the numbers that show revenue net of what the charity decides to call fundraising costs (we do not see those numbers) and then shows ALL other costs before it gets to the bottom line. The charity reports maybe 70-75% of revenues ( all donations of one type or another) go towards the charity’s mission which is extremely laudable and necessary but if you now factor in the other costs that drops to the 40’s. Lack of transparency and disclosure. It has been 3-4 years since I looked at the numbers myself but I have seen references online and in the newspaper (National Post). And the question then must be asked, how much does CanadaHelps.org take of every dollar received before it passes on the balance to the charity it works for? And then the follow up question – did the charity eliminate the bodies it had in favour of using CanadaHelps.org or are they still part of th cost burden? Perhaps CanadaHelps.org raises the fundraising efficiency but did it lower the administration costs? The article in the end is incomplete.
•Julie B
Thank you for this well thought out and easy to understand explanation of why Fundraising and Admin expenses are not the be all and end all for evaluating a charity. As an employee of a Charitable organization, I appreciate the necessity of Fundraising and Admin expenses. We try to keep our costs down, but there are some fixed costs that just can’t be reduced. Looking at what we do and how we do it is a more complex process than just looking at a few numbers, but it is crucial if the donor wants a clear picture of what we will do with the money they may decide to donate to us.
•Nancy Williams
I have a list of charities I donate to. How do I do that through you?
•Tammy
The Financial Post has checked into 86,000 lines of data from the Canada Revenue Agency to see how accountable, transparent, efficient, and effective Canadian charities have been in 2014 in putting your money to good use.
Full article: http://business.financialpost.com/2014/12/12/financial-post-charities-of-the-year-2014/
The Christian Children’s Fund of Canada – http://www.ccfcanada.ca/ was one of the top 25 charities making the grade.
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