Like for-profit businesses, nonprofit charities require personnel to keep their organization running. While their primary purpose is to provide funding and programming for specific populations, charities also use some of their funds to pay those keeping everything legal and organized.
Standardization of Charity Administrative Expenses
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 30 percent represented a charity that was at least making an attempt to maintain fiscal responsibility. Recent schools of thought have suggested the most successful charities can't be judged by their administrative costs alone, but should be valued by their effectiveness and impact as well.
What's Included in Administrative Costs
The costs to run a charity are called administrative costs or sometimes called overhead. These expenses are made up of anything required for the organization to exist that don't fall into the categories of fundraising, program activities, or membership activities.
Administrative, or management, costs typically include:
- Human resource and accounting staff
- Portions of Director and employee salaries
- Information technologies dedicated to infrastructure and operations
- Production of an annual report
- Office supplies
- Building utilities
- Legal services
- Board of Director expenses
Cost Variation by Organization Type
Different kinds of charities require different amounts of overhead, so each should aim for the standard in their field rather than one universal percentage for all charities. Charity Navigator offers a complete breakdown of ideal organization finances broken down by type of charity. In general, administrative costs below 15 percent are considered best, however there are variations, such as:
- Museums warrant higher costs up to 17.5 percent.
- Food pantries/banks and humanitarian supply charities should have lower overhead with a cap of costs around three percent.
- Grantmaking organizations shouldn't see costs higher than seven and a half percent.
Each organization allocates portions of executive and employee salaries to administrative costs. Any time an employee spends carrying out administrative duties, rather than program services or fundraising, is allocated to the administrative cost category. Aside from Human resources and accounting personnel, most charity employees' salaries cannot be totally attributed to administrative costs.
Organizations with more than one program category, like research and education, should separate administrative expenses for each category. This gives an accurate look at what is being spent on each program specifically.
Donors have often requested that their cash donations go directly to the implementation of a program. In studies by Harvard Business School, researchers found people are nearly three times as likely to donate to a charity they know has its administrative costs covered by a private donor than one where their contribution may be used toward overhead costs. 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.
Pros and Cons of Administrative Expenses
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.
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 the organization outsources the actual program implementation to other agencies and has little overhead. Still another hypothesis is the agency is running with fewer staff than needed or operating with under-trained and under-qualified staff.
High administrative costs could mean 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 the organization has checks and balances in place to make sure daily operations are in compliance with state and federal laws as well as recommendations given by nonprofit watchdog organizations. In extreme cases these costs might indicate fraud or unwarranted expenditures.
Priorities and Promise
A charity's success should not be measured solely by which have the lowest administrative and overhead costs. When creating a nonprofit organization or choosing one to donate to, consider their costs and their measurable impact. A great charity keeps their priorities and promises in line by focusing efforts on helping their cause.