Where Does your Charitable Dollar Go?

How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?

A Toronto Star investigation in 2002 revealed that almost one in six Canadian charities was spending more money on running the organization than on the actual charitable work. Data from five American states shows that less than half the money collected by for-profit contract fundraisers actually reaches the charities. Meanwhile a 2003 study by Harvard Business Review and McKinsey & Co. found that non-profits in the U.S. could free up $100 billion a year by changing operating practices to become more efficient.

-          Moneysense.ca, The 2010 Charity 100: Where is your money going?

In Canada, the charity sector is a $2.8-billion dollar sector, with an average of 35 cents per fundraised dollar being used in fundraising costs. In total, registered charities paid about $762 million to third-party fundraisers between 2004 and 2008. To address high overhead expenses, the Canadian Revenue Agency put in place a rule that stated that spending more the 35% of revenue on fundraising costs could lead to the charity’s registered status being revoked. However, there are still numerous cases of charities using figures that are well above this threshold to pay for external (for-profit) fundraisers and other expenses.

On the bright side, many organizations such as the University of Western Ontario’s fundraising arm attempt to make their fundraising breakdown as transparent as possible. On their website, they state that their three-year average cost per dollar raised is 10 cents (with the Canadian Revenue Agency threshold being 35% or 35 cents per dollar). Thanks to aid from other sources, they are able to utilize 100% of their fundraised dollars for their cause, as opposed to administrative expenses.

So how do we evaluate what the cost per fundraising dollar is for a charity? Cost-per-fundraised dollar is a great indicator of how efficient and effective a charity is operated. However, different organizations interpret, include and exclude a variety of costs, such as facilities costs, percentage of the CEO’s salary that would be related to fundraising and many other items. This makes evaluating and benchmarking such ratios between organizations very difficult.

There’s also organizations such as Charity Intelligence Canada, which compiles and presents a variety of information about Canada’s 100 biggest charities. This information includes the cost-per-fundraised dollar ratio, how much of the fundraised money is actually used, and what kind of salaries employees are paid. Additionally, it also reveals organizations that weren’t willing to provide information to be utilized in this database. Such information can be used by a variety of donors in a variety of ways, but most significantly, helps with the transparency of the organization’s fund usage.

Lastly, as various charities vie for your charitable donations, there are many questions you can ask them directly, including:

  1. How much goes to the cause? How high are their expenses?
  2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
  3. Is the charity run properly? How efficient and effective is their human capital? Management team?
  4. Do they even need your money? Will your money just be lying around in their reserve?

Whether you choose to invest in a microfinance fund or donate to a charity, you must consider such questions in order to make sure your money is used most effectively. When choosing how to make a difference with your dollar, consider alternatives such as ethical purchasing through a for-profit organization, where the objectives and contributions of the organization is transparent and clear.

To learn more about this topic, read this report from 2009: http://www.philanthropycoach.ca/PDF/Cost-per-Dollar-raised.pdf. Additionally visit this US article for a great comparison: http://www.charitywatch.org/criteria.html.

 

 

Tarini

Shopanthropic is a social venture based on the concept of using purchasing power as a tool to promote social change locally and internationally. We provide sustainable fashion and lifestyle products that are inspired by the latest trends from around the world.

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  • http://www.twitter.com/writerpollock Tristan

    Great article. I encourage everyone looking to leverage impact to visit these sites:
    -http://www.givewell.org/charities/top-charities
    -http://www.unglobalpulse.org
    -http://www.globalpovertyproject.com

  • Anonymous

    Tarini, I actually read Neil Edgington’s insightful counter to your post. There are aspects of both positions that are worth considering. I do believe that Neil is right on a couple points you make about challenging the basic premise that overhead costs are “bad.” But it is not that you are wrong and he is right (or the other way around). I think you both raise points that boil down to theory and good practice being tempered with caution.

    Neil’s blog = http://www.socialvelocity.net/2011/11/why-nonprofit-overhead-is-destructive/comment-page-1/#comment-5595

    With your permission, here’s what I wrote to Neil:
    —————————————–

    November 30, 2011

    Neil, I’d like to offer an “op-ed” if I could.
    I think you both polarize a situation that calls for a combination, a
    balancing, of these concerns. Said differently, like the old Monkee’s
    song, it really is “A Little Bit Me, A Little Bit You.”
    With the exception of the medical sector, I believe the animal
    sheltering sector (of the nonprofit “industry”) may be the most reliant
    upon brick and mortar facilities. In my industry the focus upon this
    aspect, PP&E as accountants call it, seems to ALWAYS lead these
    organizations astray. Their focus shifts from saving lives to building a
    bigger and prettier building. I call this empire building. And these
    new buildings are virtually unneccessary to accomplish the primary goal =
    saving lives.
    Austin (Texas) just two weeks ago opened their new $12 million animal
    shelter. Boiling it down to the basics it really is nothing more than a
    shiny version of what they had. They rave about how “unique” and “state
    of the art” it is. When viewed through the eyes of this innovative old
    timer, it really brings nothing new to the table. Same old, same old.
    The worst part? The facility caters only to pleasing people. With its
    huge lobby and pretty paint job, it remains an old-fashioned animal
    prison. It won’t do any better to save lives than their old run-down
    building would

    Tarini C. is absolutely correct to challenge these organizations who
    have shifted their focus to building these monuments to themselves. Most
    animal shelters in big cities are little more than costly sink holes
    with little emphasis on saving lives. Shame on them.
    I get your points and I agree. But the reality of human nature is so
    important to grasp that her questions remain valid in today’s real world
    of greed and empire building.
    Our country would not at all be in the ruined financial condition it
    is in today had former President Ronald Reagan’s financial advisors had
    had any grasp of human nature when they recommended to him two fine
    concepts: deregulation and free markets. They forgot to consider one
    human aspect that screwed everything up and lead to today’s total
    collapse: human greed.
    I am actually saying that in our world both of your positions are
    correct. Tarini’s seems to come from watching people build huge,
    ineffective organizations. Yours, like Ronald Reagan’s advice, tends to
    come with a set of rose-colored glasses.

    Neil, I write only on behalf of this one specific charitable industry
    sector. I make no application of this to any other non-profit sector.
    Thanks for allowing me to comment.

    ——————–

    Tarini, I also thank you for the opportunity to respond at length.

  • Tarini Chandak

    Hi ShelterRevolution: I certainly see Neil’s perspective and agree that this is a multi-dimensional discussion. Thanks for your comment!

  • Angela

    I
    appreciate you sharing your perspective- thank you. But, I do think (as Neil
    put it so well in his counter-article) that while questions # 2 & 3 are
    great, # 1 & 4 aren’t particularly helpful or indicative of a responsible
    nonprofit vs. a bad nonprofit.

    I find
    the argument that overhead costs are a bad thing to be troublesome. If
    nonprofits do not have permission to invest in fundraising, marketing,
    technology, etc., they can have an incredibly difficult time staying in
    business and providing their programs to people who need them most. I think
    this is most apparent when it comes to investing in technology. I
    wholeheartedly believe that donors should encourage nonprofits to invest in things,
    like technology, that make their programs and operations more efficient and
    able to scale. While it may look like a lot of “bad” overhead
    up-front, it can lead to a significant increase in program impacts down the
    line. We tell companies that it’s ok to invest in technology to gain
    efficiencies … why should nonprofits be any different?

  • bradyjosephson

    I appreciate the sentiment and perspective and the dialogue
    below but have to say the fact that this is even, yet again, a topic of
    discussion shows how far off base we are. Running the organization IS the
    charitable work. We separate the aspects of charities, fundraising, programs
    and overhead into separate compartments when they are really cost centers. Why
    would we value a company or organization simply on how they allocate costs to
    cost centers? You’d think entrepreneurs and investors would understand how fallible
    this thinking is more than anyone. Charities exist to create change (in humans,
    for women, climate, etc.) and that’s how they should be measured. Period.
    Running a soup kitchen in Vancouver is a lot different than a microfinance
    organization in Rwanda yet we measure them against one another on a cost basis?
    Please. If organizations are not using resources to create change then yes, let’s
    stop giving to them. But fundraising efficiency and overhead ratios are both
    flawed measuring tools for determining change. Until we can change our
    charitable mindset when it comes to giving to charities we will always be
    handcuffing the very organizations that can promote and execute the change we
    want to see.

  • Anonymous

    I’d just like to point out that the Aga Khan Development Network is a completely volunteer-driven organization for which absolutely none of the money raised is spent on administration, and instead all goes to helping people in developing nations improve their lives by teaching locals how to do things. They build schools, parks, hospitals, businesses etc. to help locals improve their standard of living. They also provide disaster recovery for affected areas. http://akdn.org/

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