How do you run an effective business that meets its KPI’s?
Many charities operate with thin or no margin: in the financial year before COVID, 25% of charities operated in deficit and an additional 35% operated with a profit margin of less than 5%.
Many charities hold limited reserves: modelling found that a 20% decline in revenue due to the COVID crisis would result in 17% of charities being at high-risk of closing their doors in six months due to depleting their reserves.
Many charities feel vulnerable: our late 2020 survey of over 200 charities found that 77% reported that recent events had put strain on their financial operations and 52% were worried they would not be able to provide their services in the current economic climate.
The starvation cycle for not-for-profits is real. And what’s more, we found that:
Indirect costs do not indicate the efficiency or effectiveness of a not-for-profit. ie. when a charity says that 99c out of the dollar goes towards the cause, it doesn’t necessarily translate into increased impact.
Australian not-for-profits reluctantly underinvest in indirect costs. Indirect costs cover impact evaluation, effective and efficient IT, paying staff what they’re worth, accessing the best talent for the job, office space and professional development and learning.
Would investors place the same constraints on a for-profit business, focusing only on output and refusing to fund investment in good people and an effective organization?
Placing caps on indirect costs leads to lower impact, increased risk and financial vulnerability. There is clear evidence that spending insufficient resources on overheads or indirect costs can impact overall not-for-profit effectiveness, equating to lower quality program outcomes.
We’ve done the sums and the recommended percentage that funders should allocate for indirect costs is around 30% of the grant. All not-for-profits are different of course, so often it comes down to an honest and informed conversation with the organisation.
So next time overheads come up in conversation, gently guide your client to understand the full picture, not just the program they are funding.
Delve further into the evidence here.