Charities Administrative Expenses

Charities administrative expenses are always on the radar of agency directors and donors.

It has been a long-standing rule among the nonprofit industry to look at administrative costs as a benchmark to the financial health of the organization. Historically, the magic number was any costs under 25% represented a charity that was at least making an attempt to maintain fiscal responsibility. Recent schools of thought have made this argument more complex. Several items must be reviewed in addition to the administrative costs.

Funds allocation among charities may be a case of apples and oranges. While one agency may allocate all of a program director’s salary into program operations, another may carve out the time the director spends in overall support of the agency. In order to further examine expenses, an allocations review must be a part of the scenario.

Alongside allocation is the actual chart of accounts. Reviewing this area of an agency’s financials is often left to gurus. It is prudent, however, for all stakeholders to review the basic account set up of an agency. Basic questions arise from this review that will undoubtedly lead to a better understanding of administrative expenses and how the are unique to a particular organization.

Financial managers often set the tone for fiscal responsibility in an agency. Some are hardnosed and insist on controls that exist at every level to protect against any type of embezzlement. Others seek to streamline an organization and promote lean and mean operations. No one finance person is just like another. If access to the financial manager is available, take a meeting with this person and determine their goals and overall philosophy. This will guarantee a better understanding of how administrative expenses are handled within an organization.

As with for profit organizations, cash is paramount in nonprofit agencies. This is the driving force behind the push to bring charities administrative expenses down. Donors have often requested that their cash donations go directly to the implementation of a program. This is also the case when agencies receive grant dollars from government and corporation foundations. Donors should be mindful that administrative costs exist in all organizations and some donations should be given without restriction so organizations may place the necessary checks in place. Some organizations may be forced to cut unnecessary corners when dollars donated to the organization are restricted.

Low administrative costs can mean the organization is operating very lean and constantly making sure that excess is carved out of the budget. It can also mean that the organization outsources the actual program implementation to other agencies and has little overhead. Still another hypothesis is that additional personal may be needed to run the day-to-day operations of the agency.

High administrative costs could mean that there is not enough oversight in an agency. Staff duties may not be clearly defined or there may be multiple staff doing the same job. It could also mean that the organization has check and balances in place to make sure that daily operations are in compliance with state and federal laws as well as recommendations given nonprofit watchdog organizations.

The point is that a variety of conclusions can be reached regarding expenses, but it’s important to place administrative costs in perspective with several other financial benchmarks. Look at financials as a whole and ask the management team lots of questions.

by Maurice Moss

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