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Do charities spend too much of your money?

Posted by admin on December 8, 2009 in Investment Information

As a typical year end tax planning tip, numerous articles will recommend that you give to charities to receive a tax credit. Whenever I think of giving to charity, I think of my Dad telling a poor fund-raiser over the phone that he would only give money to their charity if they disclosed the amount of money spent on administration. I am sure this poor fund raiser did not have the answer on their finger-tips. But my Dad is typical of the cynical belief that too much of our charitable giving is spent on administration and not on the people who really need it.

For those who want to make sure their dollar is being used most effectively, how much is too much administration? How do these numbers get manipulated and what are some better charities to give to?

As a quick and dirty over-view, a charity’s financial performance should be generally judged under 4 large criteria (there are more but focus on these 4): (i) program expense: the higher % spent on programs over total donations the better; (ii) general administration- this is self-explanatory; (iii) fund-raising expenses; and (iv) fund raising efficiency- this is either calculated as: (a) the amount of fund raising expenses spent to raise $1.00 (the lower the better) or (b) to work it to the other way around, how much is left of each $1.00 raised after deducting expenses (the higher the better).

Here’s how the media can manipulate your view of charities if it wants to.  You take general administration expense and you add the fund raising expenses and you report on the total of the two as “administrative expenses.” Alternatively, take one bad apple and use that to paint the entire industry (remember it is news because it is an exception not a rule). Everybody gets mad. Charities issue denials.  Dads in households everywhere berate fund raisers about their administrative costs.

The issue with the above approaches (besides the gross manipulation of how you should think) is: (i) that it removes the revenue side of the equation from the fund raising expense. It would be tantamount to ignoring money brought in by your company’s sales team and seeing them only as an expense without any recovery; and (ii) it lumps all charities together whether they are good or bad and there are good ones and bad ones. For example,  museums have much higher expenses than food banks since the former has a bricks and mortar operations to maintain and the food bank primarily does not work on cash. But if one reported museum ABC is ineffective compared to food back XYZ, the poor museum would have a riot on its hands.

However, if you were absolutely forced to lump all charities , if you donated to one of the 200 largest charities in the U.S.,  Forbes Magazine estimates that 86 cents of every dollar donated to a charity went into programs. Using a much larger pool of 5,400 charities, Charity Navigator, which evaluates the health of charities in the U.S., reports that 7 of 10 charities spend at least 75 cents on the dollar on programs and the other 25 cents on fund raising and administrative expenses. Most of the literature I reviewed indicated administration costs of over 15% was excessive; please remember the limitations of comparing charities aiding different causes and not to imprint 15% as the mark for all charities.

The other expense that can be lumped into administration is fund raising expenses. The question with fund raising expenses is not whether a charity should spend money to raise money but how efficient is it raising money. On this front, the data seems pretty consistent. On the top end, if a charity spends more than 9 cents to raise a dollar, it is not using your charitable dollar wisely. Again, there are large variations on efficiency depending on the type of charitable organization. A food bank gets lots of free advertising. A hospital has to pay for expensive ads in print, radio and television.

Charities are like any other industry. There are good ones, bad ones and indifferent ones. Here are several tips to make the most of your giving:

Accept the fact there are administrative costs. People do not come to an auto shop and demand that they want to pay for a tune up after the costs of the book-keeper, accountant and the guy who answers the phone out front are taken out. No business can run without administration. The key is how much is too much?

Give direct rather than to canvassers. Professional fund raising bodies take commissions first before any of the money go to the programs. Make your charitable donation count by giving to the source.

Research how does the most with your dollar. Charity Intelligence Canada recommends charities in various fields. Charity Navigator does the same in the U.S.

Give local and community based. This is a personal bias since I volunteer at a local and community based charity. The big charities attract the corporate money because of the high profile it gives to its donors. The well-run community based charities get no glory but do equally hard work and in your community.

Finally, if you cannot afford to donate money to charity, donate your time. In many respects, charities need skilled volunteers more than money. If you believe a charity is truly not using your money wisely, volunteer and make a difference by other means.