Although Charity Commission research shows that donors want most of their hard-earned money to be spent on frontline activities, most people understand that a moderate amount needs to be spent on a charity’s running costs. Unfortunately, the concern about administration costs leads some charities to claim that all the income raised will go directly to the cause, implying that there are no overheads.

Charities incur compliance and other operational costs to uphold the rules and requirements from regulators and to comply with policies, for example on internal controls, risk management and IT security. A charity that trains its staff and volunteers and monitors and evaluates its operations is likely to be more effective than a charity that does not. In some areas, training, supervision and checks will be essential, for example where the work involves safeguarding children or adults at risk from harm, or to comply with data protection rules.

The question trustees need to ask is whether their charity is making sufficient investment in important infrastructure, which includes legal and regulatory compliance, management skills and technology.

It is important to understand that the composition of a charity’s cost base is not an indicator of its effectiveness.

Recommendations:

Charities should understand their administration and other related costs and explain how such investment will increase efficiency and improve impact, transparency, governance and leadership. If trustees and management have a clear grasp of the charity’s cost base, they can assess better where savings may be possible or where more investment could reduce costs in the longer term, for example through automated processes. 

When there is a gap between actual overheads and the amount recovered on funded projects, charities rely on unrestricted grants and donations to subsidise their service delivery. Charities that know their actual overhead percentage can negotiate more effectively with funders, communicate the true cost of their work and prepare funding bids using full cost recovery principles.