Finding the cash to cover core costs such as head office staff, office maintenance and equipment is a constant headache for charities.
Funders are interested in paying for charitable activities, not the costs of running an office. But a charity is an expensive operation and for an organisation to provide a stable, effective service, long-term funding for overheads is essential.
Funders tend to estimate core costs at around 10 per cent of project costs, but this figure has been dismissed as arbitrary, resulting in a constant underestimate of the amount of money needed to cover charity overheads (see p9).
This constant underfunding leaves smaller charities particularly vulnerable.
Unlike large charities, they don't have the voluntary income and reserves to subsidise core costs themselves. Lack of adequate core funding leaves them lurching from one project to the next with no real idea how they are going to carry on in the long term. Some small organisations are forced to keep staff on short-term contracts, so if funding runs out or doesn't come in they can let them go quickly. This leaves employees in a difficult position and leads to high staff turnover.
Charities themselves often underestimate overheads. A common problem occurs when small- or medium-size organisations take on a contract from a local authority that significantly increases their workload. Inexperienced organisations often don't realise how many new staff will be necessary or what costs will arise from such expansion.
If charities initially underestimate core costs they can't go marching back to funders saying: "We got it wrong. Can we have some more money please?"
Funders are starting to respond to the problems of core cost funding.
The Community Fund, for example, is likely to start providing some funding for the overheads of organisations running projects in a new strategic plan.
But, in order to push funders into putting more money towards core costs, charities need to make sure they stop underestimating core costs.