Don’t judge a charity by its overheads

Posted on Jun 16, 2015

The Millione Foundation’s purpose is philanthropic. It exists to fund the building, equipping, and development of primary schools in Sierra Leone. Its objective is to give some of the world’s poorest children an education they would not otherwise have had. But it is not a charity. Its mission is “charitable” but its’ legal and tax status are as a limited company.

Unlike most limited companies The Millione Foundation has no shareholders or owners. It is a company limited by guarantee with myself, Cliff and Mike as directors. We are charged with running the business to achieve its objectives. We make profit from selling wine, we receive donations and gather sponsorships.

A company limited by guarantee is a common form of legal structure for social businesses like Millione whose ultimate goal is a social rather than financial one. We operate on a voluntary basis with no paid employees, buying in specialist skills on a free-lance basis as necessary- the accountant, website developer, sales people and so on. But this voluntary approach is not a requirement of a social business. Some are quite large organisations with many employees.

It’s a truism in life and in business that to get more out you first need to put more in. Results depend directly on resource, quality and effort. Smart businesses know that to achieve superior results they first need to spend money employing more and/or better people, and investing in business growth areas like marketing and technology.

Nobody really questions this logic in the context of a business, even a social one like Millione. But when it comes to charities one of the first questions people ask is how much of every £ goes on overhead costs and how much goes to the people the charity wants to help. Donors want to know their money is getting to the needy, perhaps fearful of paying for fat salaries, lavish offices or unnecessary cars. Many charities respond by taking pride in announcing how little they spend on overhead costs and how much goes to the end purpose. (Depending on how it is measured most declare between 10-25% on overheads)

All organisations need to be efficiently run. But this is the wrong question and the wrong answer. Focusing on overhead cost is missing the core point.

What really matters is measuring the success of the charity’s operation- both the results it achieves in the field and its success in raising funds. In this respect a charity should be run and judged like a business.

For example, if Charity A can save a life by spending £50 in the field but Charity B needs £200 to do the same thing, Charity A is better. It’s able to save four times as many people as Charity B. But charity A spends 20% of its income on overhead costs while charity B only spends 10%. So if we just looked at overhead cost we would wrongly think Charity B is the one we should support.

Charity A has hired great people operating a brilliant strategy, so the results are massively better. It is more successful because it has spent more on overhead costs- employing more, better, higher cost people, funding research into finding effective solutions to the problem and so on.

The argument for increasing overheads applies to fundraising too. Imagine that a charity was raising £1m a year in donations while keeping its costs at 10%, or £100,000. It will have £900,000 to spend in the field. If it increases the fundraising resource by another £100,000, the overhead cost rises to £200,000. If these new fundraisers are great people with brilliant ideas the extra fundraising revenue may rise from £1m to £1.5m. The charity now has an extra £400,000 to spend in the field (£500,000 more income from £100,000 more cost) and the overheads have increased from 10% of revenue (£100,000 out of £1m) to just over 13% (£200,000 out of £1.5m).

This is not an easy subject because it appears counter intuitive. But for donors deciding which charity to support the question should be “tell me how much cash you raise and show me what you achieve with every £ spent”, not “tell me what percentage of income you spend on overhead cost”.

For a brilliant, captivating explanation of this issue watch Dan Pallota’s TED talk

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