Strangely enough, the one thing that most people know about giving to nonprofits is wrong. Most people believe that the percentage one nonprofit spends on administration costs is an indication of how effective they are.
Unfortunately, this percentage is often more a result of accounting practices than of the efficiency of the nonprofit. To understand how this works, take the recent controversy over the 100,000 misprinted shirts the NFL donated to World Vision.
In their press release, World Vision states that the 100,000 pieces of donated clothing are valued at $2,000,000. This means each item is worth approximately $20. I don't know how they determined this amount because the shirts are misprinted and contracts with the NFL prevent them from being sold in the U.S., but that's the number they agreed upon. Each shirt is considered a "program cost" when it's given to someone. The cost of getting that shirt to the person is considered an "administrative" cost.
So how much is the "administrative" cost? In World Vision's fundraising appeal they ask for donations to pay for the cost to ship clothes, shoes and medicine. They claim "your gift carries the impact of 11 times its face value." So they're estimating that the cost of shipping goods averages out to be a 1 to 11 ratio of transport (admin costs) to shirt (program costs).
Going with that average (and knowing that it would vary some depending on what's being shipped), the cost of shipping a shirt is $20/11 or $1.82 per shirt. Assuming these figures are correct, this is how you would determine the percent spent on administration. World Vision spends $1.82 (admin) to ship a $20 shirt (program). So total amount is $20 + $1.82 or $21.82. Next, to determine the percentage spent on administration, divide the admin cost by the total cost, so $1.82/$21.82 or just 8.3 percent. Using these numbers, the NFL shirt donation appears to be a very "cost efficient" program.
But this $20 is just an imaginary number because this is a shirt, not a $20 bill. The only monetary value it has is what someone is willing to pay for it. So what is the actual value of the shirts? It depends.
According to AERDO Interagency Gifts-In-Kind Standards, the company must be able to sell the goods independently for the same amount they're claiming if the goods were sold on the day of the donation.
"3.5 Fair Value: GIK donations are to be valued based upon "the price that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants" as of the date of the donation (FASB ASC 820-10-35-2). This is known as an entity's 'exit price.' This assumes the transaction would be an 'arms-length' transaction."
So can 100,000 shirts of the losing team be sold at $20 each after the Super Bowl, probably not. But even if it was possible to sell that many shirts for $20 each in the U.S., they're not allowed to. According to a 2007 New York Times article:
"The other set of championship gear -- the 288 T-shirts and caps made for the team that did not win -- will be hidden behind a locked door at Dolphin Stadium. By order of the National Football League, those items are never to appear on television or on eBay. They are never even to be seen on American soil."
So the fair market value, on the date of donation, in the U.S. could be thought of as essentially $0, unless the NFL is willing to change their contracts and licensing agreements.
The next question then is what is the value of the shirts in the countries where they will be distributed? Let's say the shirts could be sold on the local market for somewhere between $1 and $10.
If the fair market value of the shirts is $1, then the amount per shirt is $1 (program) + $1.82 (admin) = $2.82. The admin ratio would come out at $1.82/$2.82 or 64.5 percent. This exact same shirt distribution would now appear to be a horribly inefficient program. In fact, World Vision would pay $0.82 more per shirt ($82,000 total) to import the clothes than to purchase shirts in the local market place. It's actually not all that uncommon for organizations to pay more to import donated goods than it would have cost them to purchase the goods locally.
Now let's imagine that similar shirts sell in the market place for $10 instead. The amount per shirt would be $10 (program) + $1.82 (admin) = $11.82. The admin ratio would come out at $1.82/$11.82 or 15.4 percent. Now the shirt distribution appears to have an average cost efficiency.
So, depending solely upon the illusive "fair market value," the exact same program can appear to be very cost efficient (8.3 percent), horribly inefficient (64.5 percent), or about average (15.4 percent).
To show just how illusive "fair market value" can be, here's a section from World Vision's Chief Financial Officer's Financial Assessment of 2010:
"A change in valuation methodology for pharmaceutical products donated to World Vision lowered revenue for the year by about $140 million. This change reflects new accounting rules clarifying how to determine fair market value for donated goods, and applies to all U.S. organizations receiving gifts-in-kind. Certain donated pharmaceuticals, which World Vision had previously valued by reference to U.S. wholesale prices, are now being referenced to wholesale prices in countries representing principal markets for those products (which tend to be lower than U.S. prices)."
Simply by revaluing their donated medicine based on the local market rather than the U.S. market, World Vision lost an imaginary $140 million.
The administration ratio is a fairly meaningless number. Too often it is based on accounting practices rather than how efficient the nonprofit actually is.
Follow Saundra Schimmelpfennig on Twitter: www.twitter.com/Good_Intents
Ellen Friedman: Encouraging Charitable Efficiencies: More Charitable Than Discouraging Nonprofits
Charity Navigator - How Do We Rate Charities?
Charities Administrative Expenses - LoveToKnow Charity
Charities With the Highest Admin Costs | News | Money/Investing ...
How to tell good charities from bad - MSN Money
Rating the Performance of Charities : NPR
The second thing that turned me off from giving money are the disgusting ads on TV for Save the Children.
Unfortunately, a blanket statement of all large charities are bad and all small charities are good is incorrect. There are issues with both sizes of organizations. With small ones the issue often is a lack of competency in the area where they are doing the work leading to some very questionable projects with potentially negative outcomes.
Just as you cannot judge a charity by the admin ratio, you also cannot judge a charity by its size. No one factor can determine the quality of the organization.
But I remain cynical about giving to large funds and disaster relief appeals.
With this pressure to have low overheads, many organizations are forced to hire inexperienced staff who do not have the competency to handle the scale of the operation. Slowing down work and creating its own form of waste if issues are not handled well and in a timely manner.
After all, we ask others to donate... the least we can do is walk the walk ourselves.
As of this writing, we are still 100% volunteer.
I do not give to these conglomorates etc. I only give locally and to state ones in my state that I know what they do and can see their opperation for my self. I recomend that to all.
People should never get involved in phone call donations they are very dangerous to give info. Ot the police and firedepartments whoes. Unions hire companies to do the collecting. I know because as a Union member we hire 4 over a period of 8 years and got nailed everysingle time because of the tactics used on the elderly who they specifily target.
The march of dimes is the worst offender to this day and we all remember the tens of millions paid out to upper mnanagent. They are not big business that pay for performance and profit gains I though. Ruins the word charity in my oppinion. I volenteer at different times for many things, free of charge for cleaning to, food service, computer advice and help of all kinds. I live fixed income but still give what I can in funding only locally. That is my way and I again recommend that to all. ;-}
It was Fidel Castro of all people who made a plaintive appeal to charities and friends of Cuba to stop over-valuing product donations. He said on Cuba's national TV (to paraphrase): "Last year, our friends abroad claim to have sent Cuba over $2 billion worth of humanitarian assistance. We have independently re-valued that aid at $14 million. Using the higher, unrealistic number harms us as our enemies [in Washington and Miami] will use this as an excuse to maintain the trade embargo on Cuba.
I don't see anything about why we shouldn't assess a nonprofit's effectiveness or accounting practices based on its administrative expenses which was the author's original premise. What did I miss?
It is conceivable that at our current growth rate, we may one day have to abandon this perfect record and hire workers to help out. It is very hard to find talented and dedicated people who are willing (or even able) to work tooth and nail for free.
However, it is still possible for anyone interested in 100% efficiency with their money, to adopt a project from us. You can pick a project that appeals to you (based on the type of help, the location, or whathaveyou) and donate as much or as little as you care to... literally every penny you give will go to that specific project.
The only other charities we know of that even attempt to make a simmilar claim do so because certain key donators agree to put 100% of their donations towards administration and infrastructure. [This is not to belittle any of the other fine organizations out there.]
Check out our work at http://watercharity.org, and our appropriate projects initiative (immediate response, low cost projects) at http://appropriateprojects.com.
We actually, pre-fund every project that we do out of pocket. Then we recoup our expense after the fact from your donations.
[Wyclef, if you're listening, hit us up...]
Not sure what your issue is here, though, Rich.
We fund our projects out of pocket as soon as they are approved. We post the projects online, and then let people donate to specific projects that they like. Thus, we "recoup" the money we have already spent. It is not really very complicated. Nor does it require any of Humboldt's finest to imagine.
Most organizations spend more on their proposals than we do on actual completed projects. We're all about transparency. With other groups, it is not clear what your $20 bottle of water buys, exactly. We feel that tangible, immediate benefit to communities trumps photo-ops and full page ads in the NY Times.
That said, we believe that every charity in the water crisis "rocks." Whatever they do, however they spend the money they raise... at the very least, they are raising awareness on this most crucial of issues.
At a time when lack of clean drinking water is killing more people than all forms of violence combined... including war... there is no room for infighting or "oneupsmanship." We just want all 1 billion people who don't have clean water now, to have access. That's it.
We have a unique model. See for yourself. http://watercharity.org
"Stop Giving Donors What you Think They Want" - 2011 http://hmrl.es/f2Td8q
"The NonProfit Starvation Cycle" - 2009 http://www.ssireview.org/articles/entry/the_nonprofit_starvation_cycle/
"Nonprofit Overhead Cost Project" - 2004 http://nccsdataweb.urban.org/kbfiles/311/brief%203.pdf
And here is a joint statement from charity watchdogs on why it's a bad metric "The Worst (and Best) Way to Pick a Charity" - 2010 http://www.philanthropyaction.com/nc/the_worst_and_best_way_to_pick_a_charity_this_year/
There was a recent study (search for "Nonprofit Overhead Cost Project") where they have stated that organizations that spend little on Admin costs are actually less effective than those that do.
Nonprofit agencies end up spending all their money on their programs to get better listings on sites like Charity Navigator so they'll get more funding. But they don't have everything in place they need to do their jobs and so the money is practically wasted.
Try not to ask how much an organization spends on its programs but ask how effective their outcomes are with the programs they run.
http://vertexsystems.com/blog/2011/01/spending_on_nonprofit_overhead_needed/
It turns my stomach to even type this.
Just like the big corporations few benefit even when they are working for them. So do people think they are really giving anything away for free.
It is really terrible that a lot of retail and food corporations have their employees begging for donations.
They do not even give them a commision for their efforts.
No more money for CEOs!
#1 I found a beggar that would actually hit his head against a wall to bloody himself, then say he got mugged and needed money to leave town only to see him go into a convenient store and buy a bottle of liquor. #2 I once asked a beggar on the street who had a sign saying he would "Work For Food" if he would come to my place and rake leaves for dinner. His response was "Dude , I just want some cash" #3 Another beggar I told, "No money, but I will take you to get some food" He looked at me with disgust and said "I want money" People like this put you off to helping the homeless. Many are just scam artists.