Since we value honesty, but donors and funders don’t want to support administration costs, how can we ethically define and report on administration costs?
It is extremely unfortunate that some nonprofits perpetuate the misleading idea that it is possible to run an organization without needing funds to support administration costs. Claims that every penny goes to programs merely hides the reality that someone is covering the core costs so that new donors don’t have to. Unfortunately, the result is that some donors interpret the message to mean that no administration expenses are incurred, even though they are looking at mail that cost money to print and send, with a phone number to call and an obvious requirement to record donations, send tax receipts and make government filings.
Only the very tiniest all-volunteer groups can operate without administration costs, and even then only if the volunteers spend time getting services such as Internet domain hosting donated, and do not claim their own direct expenses such as travel to board meetings. It’s unrealistic for any donor to think that all the costs of having an office, a board, financial records, audits, etc. will miraculously disappear just because the organization does good works. Admittedly, Internet-based phone services, free email providers and other such online services can be used to keep expenses to a minimum, but I haven’t ever seen them truly reduced to zero.
Educated donors and grant-makers now refuse to give to any organization that claims to have no administrative or fundraising costs, and perhaps that approach will spread over time. In the meantime, you should report the real costs of administration, since donors have a right to understand how their monies are being used. Administration costs over 15% of total may be questioned, but you are best to proactively explain the costs rather than try to deny them. A start-up, for example, may have extra administrative costs in its first few years, or perhaps there was an excellent reason to send a couple of board members or senior staff to an international event that year. In a small nonprofit, that alone could skew the percentages considerably.
With a large staff, many will work in a single program area and it is easy to assign their salaries, benefits and related costs to a program. When four people are handling six programs plus administration and fundraising, it takes much more effort, and sometimes financial skills, than small organizations may have. It’s critical to make sure your accountant understands the need to separate out program from administration costs and helps with this at each year-end.
What is an administrative cost? Generally, it is whatever isn’t a program or fundraising cost. It includes the direct cost of supporting governance (annual general meetings, board, board committees, membership), financial management including audit fees, and general communications such as member newsletters. If there are staff members working full-time on administration, it includes all the cost of the space they occupy, their equipment, and of course their payroll costs.
Then you have the costs of people who partly work on administration. Those individuals, always including the Executive Director or equivalent, need to provide an annual estimate of their time on each type of work, adding up to 100% of course. Perhaps someone spends 20% of their time on finance, 60% of their time on programs, perhaps in volunteer management, and 20% of their time supporting governance. Another spends 30% of their time on general office administration, 50% on fundraising, and 20% supporting a program. An executive director might spend 60% on administration (mostly governance), 10% on fundraising and 30% on programs — including hiring and managing senior program delivery staff, evaluating programs, researching and initiating programs and covering for absent managers. Programming costs are not limited to direct service delivery.
For individuals whose time is split among activities, all their costs need to be prorated, including payroll costs, office supplies, IT support, telephone bills and much more. You may find it easier to do this at year-end, but assigning at least the payroll amounts to the right areas throughout the year will give the board and management much better in-year information on how monies are being spent. Other costs can be fairly simply to track once you’ve determined the overall percentage to apply to general costs to calculate the administrative portion. Your financial management software may have relatively easy ways to build in such calculations each month. Try to group programs so there are not too many calculations required, but be sure to separately track programs that are separately funded or need to be separately evaluated.
Many small nonprofits fail to prorate costs and end up reporting many program costs as administrative, showing up to 85% as administration. That approach can really harm your organization, costing you not only donors, but also members and perhaps hurting your reputation.
Take particular care with fundraising costs, and do not lump these with administration. Not only donors and grant-makers, but also regulators want to see these separated out. If your website includes a way to donate, assign part of the web costs. If a staff person supports a Development Committee or the annual gala and auction event, a portion of their payroll costs is also part of fundraising. If a third party does some of your fundraising under contract to you, remember to show the gross amount of donations received, to match to your tax receipts issued, and show the third party costs under Expenses. Showing only a net amount is not ethical, and is also not legal as I understand it; although this isn’t an area of expertise for me.
Finally, look at the optics of your public reporting. Administration does not have to be at the top of the Expenses list just because it would be first alphabetically. Perhaps your statements would read better if the largest costs, likely programs, were reported first. All the programs could be reported under a Programs and Services heading and subtotalled, making the amounts that follow look quite small.
In summary, the ethical approach is to be scrupulously honest and able to justify how the amounts are calculated and reported. However, there is nothing wrong in making sure donors’ attention is directed first to the programs and services they want to fund.
Note: This article was written in collaboration with Anne Buchanan, a consultant in Ottawa. She managed the ethics program at the Canadian Council for International Cooperation for many years and has written numerous resources to guide good practice in voluntary sector/civil society organizations. Anne can be contacted at anne.buchanan@rogers.com.
Since 1992, Jane Garthson has dedicated her consulting and training business to creating better futures for our communities and organizations through values-based leadership. She is a respected international voice on governance, strategic thinking and ethics. Jane can be reached at jane@garthsonleadership.ca.
Because nonprofit organizations are formed to do good does not mean they are always good in their own practices. Send us your ethical questions dealing with volunteers, staff, clients, donors, funders, sponsors, and more. Please identify yourself and your organization so we know the questions come from within the sector. No identifying information will appear in this column. To submit a dilemma for a future column, or to comment on a previous one, please contact editor@charityvillage.com. For paid professional advice about an urgent or complex situation, contact Jane directly.
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