While it seems logical that the less a charity spends on administration, the more donation dollars reach the people that need it the most, it is not as simple as that. In reality, the amount that a charity spends on administration costs is a meaningless indicator of effectiveness and it is potentially harmful to think so.
The amount spent on administration is no indication of the quality of aid
The amount spent on administration does not relate to the quality of work, whether projects were successful, or if the aid was even needed. Cheap programs are not necessarily better programs and can often be just the opposite.
Administration costs can be manipulated both at the field level and the accounting level
Field level -- Organizations can alter how money is spent to make it appear to be a program cost instead of administration. In Thailand, I oversaw four programs working across six provinces. In each province, we wanted to put all the programs together in one office to increase collaboration and share resources. If we paid for the office ourselves, it would be considered an administrative cost. If we gave each program money to rent their own office, it would be more expensive but would be considered program costs.
Accounting level -- Organizations can assign percentages of staff time to either programs or administration. A staff member could have 90 percent of their salary recorded as a program cost and 10 percent assigned to administration. Organizations can appear highly efficient if they overvalue the donated goods they collect and distribute, making it seem that they provide more for less.
The pressure to keep administration costs low can impact the type and quality of programs
Organizations may under-staff or under-resource programs damaging their chances of success. If a charity does not have enough trained staff, they may spend too little time getting to know the needs of the aid recipients/participants and developing the program with them. This can lead to donations wasted on programs that are not wanted or needed by the people they are supposed to help.
Organization may prioritize or specialize in projects with inherently low administration costs such as construction or donated goods. Construction materials are so expensive that there is a naturally lower percentage spent on administration. Donated goods also have relatively low administration costs when compared to the value of the donated goods claimed by the organization. In international aid this can lead to schools built and libraries stocked with books, both of which go unused because there is no money to hire teachers whose salaries are often seen by donors as administration.
Be wary of any program claiming extremely low administration costs
Administration is a necessary part of aid work. Organizations claiming all money will go directly to the aid recipients/participants either have a secondary source of funding, are expecting volunteers to cover administration costs out of their own pocket or are not being honest with donors.
Meaningful financial indicators
Instead of focusing on the percent spent on administration, look for a detailed breakdown of the previous year's expenses and financial audits from the past three years. Charities should be transparent about how they spend their money and how they manage their finances. If they don't trust you with their financial information, why should you trust them with your money?
Want to learn more?
What to look for in a nonprofit's financial audit
A podcast discussing nonprofit administration costs
How to choose a charity
Follow Saundra Schimmelpfennig on Twitter: www.twitter.com/Good_Intents
• Reach out to community leaders and ask them which organizations are doing innovative work in your areas of interest.
• Review nonprofits’ websites, annual reports, and other materials. Your tool at http://www.thecharityrater.com is a great way to help donors with their website review.
• Get on the Web and look for positive press and discover any concerns that have been publicly raised.
• Make direct contact with organizations. Once you have a few organizations identified, contact staff leaders and ask to be put in touch with one or two current donors who are giving at the level that you intend to give.
• Take a field trip.Visit the organization to experience their work directly.
• Seek evidence of community engagement, collaboration and impact. Ask for copies of public planning documents, results from community surveys, and outcome measurement reports.
• Ask for and review a copy of the organization’s most recent budget and financial data.
The info above is excerpted from a Draft Donor Tip Sheet called "Ready to Choose a Community-Based Organization to Support? Look Beyond “Charity Rating Systems” and “Nonprofit Expert Evaluators” which can be found here: http://www.thirdsectorconnector.org/ReadyToChooseDraft.pdf . And we're currently crowd-sourcing edits and input (through April 30) here: http://clicky.me/JoinSECB .
But don't just take my own word for it, here's a joint press release from several charity watchdog organizations debunking the usefulness of administration costs when rating a charity http://bit.ly/6kjV9d. If we must look at finances then it would be more helpful to know that the charity is following good financial practices including having annual audits or financial reviews.