About a third of charities do not know what their overheads are, according to Mark Salway, director of social finance at City University’s Cass Business School.
Speaking at an event held yesterday by the Honorary Treasurers Forum about the lessons charities can learn from the closure of Kids Company, Salway said his own conversations with charities had led him to believe many charities did not know how much their operating costs added up to.
He warned delegates that treasurers needed to be clued up in the wake of the closure of Kids Company.
"I’ve worked with a lot of organisations that don’t know what their overheads are," he said. "Therefore, when they come to negotiate contracts they can’t negotiate properly."
Salway pointed to a report called The Current and Future State of Charities 2015, by the financial services firm Baker Tilly, which found that 6 per cent of charities offering services made no attempt to recover their overhead costs.
He said this could be a mistake as grant funding became scarcer.
"Diversifying your income and cost recovery – thinking about those two things in the context of sustainability – are critical for you guys as honorary treasurers," he said.
But Salway warned that charities should not focus solely on cutting overheads.
"We have this total fixation where charities are being judged on their overheads, not the impact they’re having – and that’s not right; it needs to be about the impact," he said.
"There’s starting to be this cycle in which organisations cutting their overheads will not be sustainable."
He said charities should not be afraid to use their reserves when they saw a rise in expenditure or a dip in income on the horizon, rather than waiting for the problem to hit and spending reserves only when it was absolutely necessary.
Salway said that charities were experiencing a "perfect storm" of scrutiny after controversy in the media about chief executive salaries and fundraising tactics, which had been negative but had not previously affected the operational side of the sector’s work.
"Kids Company changed that, and what I’ve seen is that the media has started to challenge our work, our legitimacy," he said. "I think as a sector we need to stand up and have a voice against that.
"So I think we’re at a time of unprecedented scrutiny where you as honorary treasurers have a more important role than ever before."