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:
- How much goes to the cause? How high are their expenses?
- How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
- Is the charity run properly? How efficient and effective is their human capital? Management team?
- 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.