In the Statements of Recommended Practice consultation, we are being asked to consider a key facts summary to be appended to the trustees’ report. This sounds like a good idea: charity accounts and reports have become far too long and cluttered and it is difficult to get to what really matters. The consultation refers to both charity-specific and mandatory disclosures aimed at helping to address this, and the particular aspects being suggested include disclosing charitable expenditure as a proportion of total income as a percentage and the equivalent pennies in the pound.
This looks innocuous, but I am concerned whether what is being suggested will deliver the desired outcome and how the "key facts" will be presented and used. Because financial accounts are based on financial reporting standards and focus on inputs in a year, my concern is that using this information will lead to flawed conclusions.
This might not be the intention, but there is still a spurious belief that charities can be measured and compared by presenting charitable expenditure as a percentage of the income raised. The calculation of ratios on the Charity Commission’s beta site has now been changed and also has a caveat on the limitations, but fundamental issues still exist. The fact is that any endorsement from the regulator or the Sorp of a ratio-based approach will be a retrograde step. It is not possible for analyses to cater for all the nuances that would give credibility to the percentages shown.
Income is often unpredictable and it is impractical to match expenditure in a way that would create meaningful comparisons of spend percentage. Some charities’ operating models require them to spend all the funds they receive as soon as they can; others have longer-term projects and programmes that need to be funded in future years. Some make grants; others deliver services. Another issue is when a charity builds, for example, a new hospice or purchases mission-critical land. Accounting rules mean that the accounts do not include this as charitable expenditure in the year.
Fundraising cost ratios are influenced by a number of factors, and the fundraising mix is an important one. For example, legacy fundraising has a very low cost ratio, whereas cost ratios for special events, retail operations and direct mail are usually much higher. Some types of charity will have an inherent fundraising mix that predisposes to a lower fundraising cost ratio, but this does not mean that they are more effective.
With most forms of fundraising there is very little correlation between what the accounts report as costs and the actual amount raised in a year. There is a real concern that a well-intentioned suggestion to improve the usability of financial statements and reports will lead to flawed and spurious comparison, and even support views that there should be a mandated level for spend.
In its fundraising guidance, the Charity Commission says there is no set amount that charities should spend on fundraising costs and costs "can vary between different forms of fundraising, different causes and from year to year".
Charities understand this, but are also to blame by perpetuating unrealistic expectations and poor understanding by highlighting their financial ratios as a measure of effectiveness. This is because it is thought to be what donors want to see, and consequently the more difficult reporting on performance falls by the wayside. Charities need to be bolder in their messaging, explaining operating realities, costs and what they are really achieving. We need to stop talking about good and bad expenditure and focus instead on performance. A key facts summary that focuses on categories of expenditure is likely to lead to the same old flawed measures.