The amount that charities spend on administration and support costs is a useless indicator of how efficient they are, according to a new report from the think tank New Philanthropy Capital.
NPC’s report, Keeping Account: A Guide to Charity Financial Analysis, published today, is designed to give advice to funders and others on how to get a meaningful understanding of a charity’s financial position.
It says that the popular trend for judging charities on how much they spend on overheads is "misleading – dangerous, even".
The report adds that there is a lack of consistency over how information on administration costs is presented in accounts, meaning that attempting to judge charities on the proportion of their expenditure in these areas is pointless.
"Management and administration costs are a necessary part of running a charity effectively," it says. "Analysis of charities from the United States comes to the clear conclusion that low administration costs do not signal that a charity is good: they signal the opposite."
The report also maintains that charities that reduce these costs as much as they can for the sake of a fundraising story "might struggle to run their operations smoothly, analyse their data, or plan for the future".
"Charities that slavishly follow a particular ratio are more likely to rely on poor systems, under-invest in people and facilities, and distort their true overheads," it says.
Iona Joy, head of charity effectiveness at NPC and joint author of the report, said: "‘NPC knows – and the sector knows – that overhead cost is not a predictor of what a charity can achieve, so it is deeply frustrating that so many charities continue to promote low or apparently non-existent overheads in their fundraising.
"Efficiency is not about spending as little as possible on administration, fundraising or the salary of top management. Charities have to invest in these functions to be effective. What is important is that the money raised achieves impact."The publication suggests ways of identifying if a charity is well run, such as looking at whether the charity is financially sound, where its income comes from and how big its reserves are.