A fear of how the public will view investment in charities’ internal infrastructure has led trustees and managers to "shy away from making good decisions", a new report warns.
The report, Positive Impacts in Challenging Times, published this week by the Institute of Chartered Accountants in England and Wales, says charities must invest more in leadership and infrastructure in order to retain public trust and operate effectively.
"Trustees and management have often shied away from making good investment decisions because they believe that it will impact negatively on how they are perceived," it says.
"This has resulted in underinvestment in vital areas such as information technology, skills training, income-generating processes, and governance and management."
The report says charities should be prepared to spend more on infrastructure and support functions if it will improve their efficiency and effectiveness.
"Investments in training, evaluation, internal systems and fundraising are important as they enable charities to improve their performance," it says.
"The risk is that under-investing in infrastructure can actually lead to a deterioration in a charity’s performance and the resilience needed to be able to sustain effective delivery."
It says charities are to blame for "perpetuating the myth that reduced overheads mean the charity is more effective" and "this leads to a vicious cycle of underinvestment and the belief that more can be done with less.
"Charities should be ready to make the necessary investment in infrastructure based on what is needed rather than how it may be perceived. Expenditure decisions should be governed by what is in the best interests of achieving objectives effectively, which may require more investment in infrastructure."
It notes that cost ratios of how and where funds are distributed are flawed "in almost all cases" and "lead to inaccurate conclusions".
The report says charities should focus more on the selection, induction and training of trustees to ensure they have the correct skills and experience to carry out their roles.
"All trustees should be able to confirm that, before taking up their appointment, they have received sufficient information about the activities of their charity and their role as a trustee, and that they understand the responsibilities that come with being a trustee," it recommends.
The report says charities should also be more discerning about "unviable" payment-by-results contracts to deliver public services, the report says.
"The practice of winning the contract at any price can be harmful to charities and the causes they serve," it says.
It says charities are likely to be better off bidding for such contracts as part of a consortium, so participants can be more efficient by sharing logistics and infrastructure.