When people donate to charities, they want to know that their money will be used effectively and it will make a difference to the cause that they support. Some people try to assess this is by examining the charity’s administration costs.
While it is reasonable to want to ensure that each dollar you give will be used well, assessing and comparing charity administration costs is difficult and it can be misleading.
- It costs money to run a charity – large charities with complex structures and extensive programs cost more to operate than smaller charities run solely by volunteers
- Charity effectiveness and impact is important
- More than half of all charities have paid staff
- The charity sector comprises many different types of organisations, including universities, hospitals, non-government schools, social welfare organisations, and environmental or animal protection groups
- Because charities are so varied, there is no one-size-fits-all standard ratio or percentage to measure reasonable spending on administration
- There is no mandatory standard accounting practice for reporting on charity spending – using the ACNC’s National Standard Chart of Accounts is optional
Running a charity costs money
All charities must use their funds to further their charitable purposes – this is what it means to be not-for-profit, and is a requirement of registration with the ACNC. All charities spend money on administration – without it, they wouldn’t be able to operate and pursue their charitable purposes.
It can be misleading to consider administration costs as separate from a charity’s cause, because this fails to recognise parts of a charity’s operations that enable it to deliver services.
When managing their finances, charities should exercise proper care and diligence and not be wasteful. This includes taking care when spending on costs considered as administration or overheads, such as staff, rent, transport and power.
Wherever possible, a charity should use funds in a way that maximises its impact and makes a difference for the people it was established to benefit.
Impact is important
Some charities make a real difference in the community and have relatively high administration costs, and some charities may be less effective but have low administration costs.
For example, a charity that provides health services in the inner city may have higher administration costs (rent, staff costs, equipment) than a charity that runs a temporary meal service for the homeless in regional communities (using food donations and not having to pay rent).
However, the increased administration costs don't mean that the first charity is providing its services less effectively.
Defining administration costs
Many costs can’t be easily isolated from a charity’s ‘direct’ service and set aside as ‘administration’. For some charities, delivering a service consists of a wide range of connected activities which incur a range of costs – each crucial for the overall service delivery.
For example: a rural health service provider may spend a significant amount on petrol and travel, but these are vital to the charity’s service delivery. For other charities, these costs may be considered administrative.
It is important to recognise that when looking at the financial reports of two charities, you may see similar costs treated in different ways.
In Australia there is no mandatory common accounting standard or set of definitions. This means that charities (and other organisations) may report expenses differently. This is a major barrier to understanding and comparing charity administration costs.
The ACNC manages the National Standard Chart of Accounts (NSCOA). This is a free data entry tool and data dictionary for charities and other not-for-profit organisations.
All Australian governments have agreed to accept the NSCOA when requesting information from not-for-profits. However, while it is encouraged, using the NSCOA is not compulsory.
Ratios for administration costs
Setting ratios or percentages as standard benchmarks for administration costs often ignores that the charity sector is made up of many sub-sectors that vary greatly. For example, the Australian charity sector comprises:
- Private hospitals
- Non-government schools
- Social services/welfare organisations
- Housing providers
- Environmental/animal protection groups
Even within the same charity ‘sub-sector’, each charity will have a different set of circumstances and activities, based on its services, its size and its physical location. Applying a standard ratio or percentage as a benchmark can lead to unfair assumptions about a charity’s management and overall performance.
Charities can employ people
Operating as a not-for-profit does not mean that a charity can’t employ people. The work of charities often requires qualified staff and these people need to earn a living.
In Australia, approximately 44% of all charities are run by volunteers – most of these are small organisations. However, 56% of all charities do need paid employees to be able to deliver their services.
Charities would not be able to attract the quality staff they need to carry out their work if they were not allowed to pay people fair wages for their skills, knowledge and experience.
Spending on employee salaries
The amount that a charity spends on staff salaries is decided by the charity’s governing body (its board, committee, or trustees) and will depend on the skills and experience of the individual, as well as the charity’s purposes and activities.
Staff salaries should be appropriate for the work and should be considered in the context of the charity’s activities and purposes. In many cases, to attract qualified, skilled and experienced people, charities need to be able to offer competitive salaries.
Paying board members
Most charity board members are unpaid. However, some charities may decide to remunerate board members as well as operational staff.
If a charity decides to pay its board members, this should be done with due consideration of its reputation as well as public opinion on the use of donations. Any such remuneration should be reasonable, justifiable and properly approved within the organisation.
Regardless of whether or not they are paid, the ACNC expects that the governing bodies of all registered charities are accountable and acting in the best interests of the charity whether or not the Responsible Persons receive payment.
Looking into high administration costs
Charities are independent organisations and their governing body has responsibility for their administration.
If there is evidence that administration costs or salaries are unreasonably high the ACNC may look into the operations to establish that the charity continues to be run in accordance with the ACNC Governance Standards.
The ACNC considers all the factors that may affect the perception of high administration costs or salaries in assessing such situations.