Guide to donating to charities

How much of your donation is gobbled up by fundraising fees and expenses?
 
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01 .The act of giving

Bucket of money

Nearly nine out of 10 adults give to charity, and the average annual donation is more than $400. The median donation is $100 – half of the donors give more than that. As well, 34% of us give up our time to support charities and other non-profits by volunteering.

But despite such widespread support and high trust in the charitable sector, donors have concerns. For example, a massive 81% of the 240 CHOICE subscribers who responded to our recent survey don’t know what proportion of their donation reaches their favoured charity’s beneficiaries, after fundraising costs and overheads. But 94% percent do think it’s important to have information about the proportion of those administration and fundraising costs.

Charities' expenses are just one issue of interest to donors, and probably not the most important. Charities don’t exist to make a profit, and measures of their performance should also consider whether they achieved their stated mission and objectives.

97% of respondents to our survey think it’s 'very' or 'somewhat' important that they’re provided with information about the effectiveness of charities’ work. Ultimately, people want to know that their contribution is making a real difference — and has the best impact it can.

The problem is getting and comparing the information. Our research — including a survey of charities — found wide variability and inconsistency in the way they communicate key information to donors. That’s if they communicate it at all. Sometimes, the information simply isn’t publicly available.

While overseas aid organisations have a voluntary code of conduct to improve disclosure to donors and beneficiaries, some charities don’t make their annual reports or financial accounts available to the public. And there is no uniform accounting or reporting standard for charities.

This absence of transparency means that the 90% of us who want to donate have an almost impossible task in comparing charities and ensuring our money has the best effect.

A call for better regulation

Several of the charities we surveyed would like a single regulator for the sector, to replace the mish-mash of regulations and reporting requirements they have to comply with in different states and territories. The UK has a Charities Commission; Canada and New Zealand also have uniform regulation.

The Fundraising Institute Australia supports the establishment of a single regulator. "This initiative would greatly reduce compliance and administrative costs and should enhance regulation and consistency making aspects of fundraising such as fundraising costs clearer and comparable," it says.

CHOICE would also support such moves, particularly if they meant improved transparency and disclosure for consumers.

Please note: this information was current as of April 2008 but is still a useful guide to today's market.


 
 

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In late 2007 we surveyed our members about what was important to them in a charity. The results from the 240 respondents are shown here.
Whats important graph

What CHOICE readers said

Survey respondents were also given the chance to make comments, some of which are shown below.

  • "There seems to be a lot of competition for our dollar, with very little information available on costs and effectiveness."
  • "All charities require finances for administration, running costs — it’d be naive not to think so."
  • "I will not donate to charities unless I know how the money is split and what their overhead cost percentage is."
  • "All charities should have an easily locatable ratio of admin and frontline delivery costs."
  • "It must be acknowledged by donors that charities have operating costs and that these need to be funded from somewhere. I suppose all donors want is reassurance that a significant percentage of their donations do go to charitable causes."

The charities respond

Many charities CHOICE contacted acknowledged that the lack of financial accounting standards is a problem for the sector and its donors. Here is a sample of their comments. (Note that some respondents didn’t want to be identified.)

  • "Figures can be manipulated and misconstrued to paint the charity in a positive light."
  • "There can be clever accounting used by charities — it’s all very legal — that shows their fundraising costs as being minimal."
  • "There’s no benefit for charities in reporting their cost of fundraising accurately. There’s no benefit for charities in being transparent — they’re not rewarded for this."
  • "Charities pluck numbers out of the air for their fundraising costs. There’s no agreement about what constitutes administration costs. Some will say it’s only the people in your fundraising department. Others might include IT, HR, marketing departments ... there’s no consistency."
  • "Most people give with their heart and not their head. They should give with both. But it's hard to get the transparency and information that you need." — Pro Bono Australia.
  • "If we are to continue to receive donors' support we must be consistent and more transparent as a sector." — Charities Aid Foundation
  • "Until donors become more demanding about knowing where and how their money is spent, charities will not have a strong incentive to improve their transparency and accountability." — Givewell
  • "The cost of fundraising is open to interpretation by charities. There should be complete visibility of fundraising costs for donors. They should be able to know how much of their donation reaches the cause. It should be available on a website for free, like in the US." — Movember Foundation

Charities surveyed by CHOICE

We surveyed a mix of 11 large domestic and overseas aid charities that do a diverse range of work. Nine responded and provided the comprehensive information requested. Lifeline Community Care Queensland and the National Heart Foundation didn't send a survey response. The latter sent a copy of its annual report.

The charities in the table willingly gave CHOICE their financial info for the last year. However, the result is an example of how such info is structured in different ways, so that it becomes impossible to compare.

Organisation name Australian Red Cross CARE Australia Mission Australia The Cancer Council NSW  Oxfam Australia
Compliant with ACFID or FIA Code ACFID, FIA ACFID FIA FIA ACFID, FIA
Income ($, pa)
Donated funds 43,781,000 14,811,717 20,285,000 42,228,000 38,029,000
Grants 363,720,000 29,949,159 210,432,000 1,231,000 12,841,000
Other income 70,241,000 3,356,878 23,223,000 17,898,000 3,645,000
Total income 477,742,000 48,117,754 253,940,000 61,357,000 54,515,000
Expenses ($, pa)
Community education and programs 915,000 838,698 2,896,000 12,839,000 Not applicable
Fundraising costs 23,532,000 2,834,781 7,092,000 13,353,000 7,966,000
Administration costs 15,049,000 2,744,114 8,504,000 5,081,000 3,457,000
Service delivery and other costs 454,929,000 39,614,565 239,480,000 17,280,000 36,146,000
Excess or deficit of income over expenses -16,683,000 2,085,596 -4,032,000 12,804,000 6,946,000
 
Value of money held in reserve 257,535,000 12,740,769 41,354,000 63,175,000 29,982,000
Value of all assets including property 339,401,000 48,224,900 119,622,000 67,889,000 44,542,000
Commissions paid to third-party commercial fundraisers 20% over life of donation No
90% of first year’s donation, 25–30% over 5 years
Under 25% over the average life of a donation
70% of first year’s donation
Benchmarks: effectiveness of fundraising operations and costs
Fundraising costs, return on income, donor numbers, growth in fundraising, donations received
Fundraising cost ratios, relationships with donors, donations, brand awareness, new donors acquired
33% fundraising cost ratio, except bequests (14%)
Other state cancer councils, CFA best practice guidelines, other charities’ annual reports
Cost of fundraising, program investment and cost of administration ratios
Independent directors on the charity’s board 2 18 (2006/2007) 8 8 All (13)
Stakeholder representation on the charity’s board
Member representation
No
All directors are donors
2 cancer survivors
Directors are ordinary members and donors/volunteers
Phone number 03 9345 1800 02 6279 0200 02 9219 2000 02 9334 1900 03 9829 9444
Website www.redcross.org.au www.careaustralia.org.au www.missionaustralia.com.au www.cancercouncil.com.au www.oxfam.org.au
 



Organisation name The Salvation Army Australia Eastern Territory Social Work The Smith Family Vision Australia World Vision Australia
Compliant with ACFID or FIA Code ACFID, FIA FIA FIA ACFID
Income ($, pa)        
Donated funds 74,213,000 35,123,000 27,981,000 332,915,946
Grants 133,299,000 6,505,000 26,751,000 17,739,260
Other income 76,472,000 4,842,000 (A) 19,848,000 5,819,529
Total income 283,984,000 46,470,000 74,580,000 356,474,735
Expenses ($, pa)
Community education and programs Not applicable 33,937,000 Not applicable 2,838,936
Fundraising costs 5,817,000 9,351,000 3,240,000 27,690,897
Administration costs No figure provided 1,920,000 12,075,000 24,496,415
Service delivery and other costs 254,601,000 Not applicable 54,889,000 311,646,276
Excess or deficit of income over expenses 23,566,000 1,262,000 4,376,000 –10,197,789
 
Value of money held in reserve 77,386,000 21,140,000 188,924,000 28,926,618
Value of all assets including property 411,272,000 45,669,000 206,981,000 68,769,181
Commissions paid to third-party commercial fundraisers No No No 7.6% of the lifetime donations (B)
Benchmarks: effectiveness of fundraising operations and costs
NSW Charitable Fundraising Regulation, FIA Code
Cost of fundraising ratios
Quarterly program evaluation, comparison against other not-for-profits
Fundraising and administration cost ratios
Independent directors on the charity’s board 0 9 12 13
Stakeholder representation on the charity’s board No No
Client representative council nominates 2 board representatives
All directors are donors
Phone number 02 9264 1711 02 9085 7222 1300 84 74 66 133 240
Website www.salvos.org.au www.thesmithfamily.com.au www.visionaustralia.org www.worldvision.com.au
 

 

Table notes

(A) 'Other income' figure includes the net profit from commercial activities. If the total income (before costs) from commercial activities was included instead, the charity's total income would be over $74 million.

(B) In the financial year to 30 September 2007, only 5% of new child sponsors were acquired via third-party commercial fundraisers.

Using the table

Income An approximate breakdown of where the charities’ money comes from. The main sources are government grants, donations from the public, and the money they make from commercial operations such as shops and merchandise. The table shows that some charities get most of their income from government contracts and spend less money on public fundraising, while others get most of their money from public fundraising appeals. Comparing these charities’ fundraising cost ratios is tricky, as they’re different types of organisations, which raise money in different ways.

Expenses An indication of how the money is used. Respondents defined their fundraising and administration costs in different ways. 'Other' costs were sometimes interpreted as meaning delivery of the actual service provided by charity.

Value of money held in reserve tells you how much money the charity holds back. Sometimes, charities are criticised for holding too much money in reserve, while they continue to appeal for donations. However, charities need to ensure their long-term viability.

Value of all assets including property gives an indication of the size of the charity.

Commissions paid to third-party commercial fundraisers Not all charities use third-party fundraisers, but when they do the cost can be a high percentage of the donor’s first-year donation. See Donating effectively for more on this.

Benchmarks for fundraising effectiveness, independent directors and stakeholder representation on the board are all signs of good corporate governance.

For more information, check the charities' websites. All make their annual reports and financial statements publicly available.

Unlike in the US, charities, with the exception of some overseas aid organisations, don’t have to calculate and report their fundraising cost ratios in a consistent way. This makes 'apples with apples' comparisons impossible for donors.

The fundraising cost ratio is the amount spent on fundraising, as a percentage of the amount of money raised. In fact, many charities can put their own definitions on things like administration and fundraising costs, and juggle these expenses around in the accounts, achieving apparently low cost ratios — but they may be artificially low.

"There are numerous ways that charities can make themselves appear better than they really are, or better than their competitors, to donors," says Our Community, a group that operates the Australian Giving Centre, a portal for finding and donating to smaller and less well known charities. "Without a much-needed standard and transparent form of accounting, the existing system is used and abused."

Charities Aid Foundation (CAF), an international not-for-profit and lobby group that aims to increase charitable donations, says that unless you're a qualified accountant, you won’t be able to compare charities.

"The problem is it's often impossible for donors to assess where their money is going and how much of the donation gets to the coal-face projects," CAF says. "We know of one not-for-profit that states 10% goes on overheads, but when we examined the figures it seemed more like 30%. The difference is explained by what's identifiable as fundraising costs, management costs and project costs. There's no standard measurement."

A large majority of respondents to CHOICE’s survey believe that over 80% of their donation should reach the cause, after expenses. But only 53% of donors believe this actually happens.

There's a wide variation in the effectiveness of different charities' fundraising efforts. A few years ago, one charity was found to have given less than 10% of money raised at an event to its cause or beneficiary, after all the costs were taken into account.

On the other hand, we also found examples where close to 100% of the donation does reach the cause, often because the charity’s fundraising costs are being subsidised by another part of its operations or business (see Donating effectively).

Research company Givewell estimates the average fundraising cost ratio at 19%, while the Australian Council for International Development (ACFID) says its members spend about 10% on fundraising plus a similar amount on costs like administration (and a further chunk of the money sent overseas may be used for costs there).

Confusing figures

As a donor, you want to know where your favoured charity is placed in this wide range, but finding out isn’t easy.

Some charities, particularly the large ones we surveyed, make their annual reports and accounts publicly available, but many are less transparent. An analysis published in November 2007 by Givewell found that only 54% of the 448 charities it surveyed disclosed their fundraising costs.

Charities must comply with state legislation and complete statutory returns to regulators. The rules and requirements for charities in each state differ. Some have rules for fundraising cost ratios.

  • In NSW, for example, the maximum is 40%.
  • In Victoria registered fundraisers who donate less than 50% of proceeds to nominated beneficiaries may be subject to additional conditions or be asked to demonstrate how the fundraising is in the public interest.
  • In WA, the costs must be 'fair and reasonable'.

Ratios are published on the Consumer Affairs Victoria (CAV) website, but the figures relate to Victoria only, so won’t match the figures a national charity publishes.

According to CAV, fundraisers must report their revenue from appeals in Victoria during the previous twelve months, and the money that was actually distributed to beneficiaries, to aid disclosure and transparency for donors.

But several charities we contacted said their costs are much lower than what might be suggested by the CAV site. They gave plausible reasons for what appeared to be high cost ratios. For example, some money may have been held back for project costs in future years, or the figures only relate to particular fundraising appeals in Victoria. One charity said there was a mistake in its figures on the CAV site, which was subsequently corrected.

The problem is, reasons of this kind aren’t apparent to donors seeking information, so you’d have to ask questions, like we did. The problem is exacerbated by the different figures that are available from different sources, which cover different jurisdictions, different expenses and even different years.

How much of your donation gets through to the cause depends not only on the charity you’re dealing with, but the channel you use and the type of appeal. Charities have to spend money to raise money, but the costs differ depending on the method they use (and charities often use several different ways to raise funds).

  • "If you want to make a difference, don't wait to be asked and don't wait for the charity to spend money on fundraising. Give and give as generously as you can," says the Fundraising Institute Australia.
  • Givewell agrees that to have the best effect you should make a direct donation, rather than buying raffle tickets, merchandise or helping to sell confectionery, for example. The costs for a charity to put on a ball or dinner, to buy a car for a raffle, or to use a commercial fundraiser for sales calls and street collecting, are much higher than processing direct payments over the internet or via mail, or counting the money that’s been dropped into a collection box in a shop or restaurant.

Charity dinners and balls

After the cost of speakers, entertainment, the venue and catering, less than half of the price of a ticket might be left to go to the cause being supported.

For example, using figures from annual reports, we calculate that the 'profit' from Ronald McDonald’s House Charities (RMHC) balls ranged from 43% to 54% over the last three years (its other types of fundraising cost around 3%). RMHC clearly discloses on tickets what the cost of the ball is (it’s not tax-deductible), and that additional donations go in full to charity.

Other charity balls are less profitable. Another charity’s national fundraising manager, who had previous experience in running charity balls, said a return of 5 to 10%, after costs, was typical. "For that reason, charities are less likely to use balls and events to raise funds, because of the high costs and the need to be accountable to the people spending money (the donors)."

And in 2005, it was discovered that just 8% of the proceeds from a dinner that the Children’s Cancer Institute of Australia for Medical Research (CCIA) organised was made available to cancer research. The event, which Cherie Blair spoke at, failed to generate sufficient public support. CCIA had said in its licence application that 60% of funds raised would be dispersed.

Commercial fundraisers and consultants

For-profit companies are often used by charities — for example, on-street collections and call centre operations. While commissions based on a percentage of donations are banned by the Fundraising Institute Australia’s Principles and Standards of Fundraising Practice (and some charities don’t use telemarketing as they don’t approve of it), that doesn’t apply to every charity.

Some charities we surveyed, including Mission Australia and Oxfam, use commercial fundraising companies that keep a high proportion of consumers' donations over the first year. Charities argue this can be cost-effective. If the new donor continues to make monthly contributions for, say, five years, the cost averages about 25 to 30% of what’s donated.

World Vision also uses commercial fundraisers, but this represents a small proportion of its new child sponsorship income – only 5%.

Volunteering

34% of the adult population volunteer to various non-profit organisations, including charities. They give, on average, 56 hours per year.

If you’re interested in volunteering, charites often have details online, or try Volunteering Australia (03 9820 4100). Its website Go volunteer lets you search for opportunities in your interest area and postcode.

Many CHOICE readers told us about volunteer work they do and how valuable they feel it is.

  • "I give volunteering time (I drive a corporate blood donor bus) one day a week. It makes me feel that I'm directly contributing to the charity, in however small a way."
  • "Volunteerism is a vital part of our social fabric. Without people donating time and money to charitable causes the public purse would be put under intolerable pressure."

07.Are fundraising ratios misleading?

 
The Fundraising Institute Australia (FIA), as well as a number of academics and experienced players in the sector, think the media and donors place too much emphasis on the cost of fundraising (COF) ratios as a measure of a charity’s efficiency and performance.

The problem, as this article identifies, is that charities' ratios are calculated in different ways, taking different costs and revenues into account, so they can't be compared on a like-for-like basis.

"We’re sceptical of any systems that try to rank charities," says Professor Myles McGregor Lowndes, Director of QUT’s Centre for Philanthropy and Nonprofit Studies. "People now want to know they’re getting bang for their buck, and are becoming more scientific about comparing charities, but accounting and finance are not the only measures."

A second problem with using COF ratios is they don't necessarily indicate charities' effectiveness. Research from the US (the Indiana University’s Centre of Philanthropy) found that an overemphasis on low costs by charities can reduce their effectiveness and corrupt their accounting, rather than enhancing their efficiency.

Nevertheless, CHOICE thinks donors have every right to know how much of their money reaches beneficiaries, and to be able to compare charities. But unless standardised reporting is introduced, you’ll need to spend some time researching a charity to get an idea of how its expenses and project effectiveness compare with other charities.

The Institute of Chartered Accountants in Australia (ICAA), which has developed guidelines for not-for-profit reporting, recommends that at a minimum, charities should include key performance indicators such as the ratio of fundraising revenue to fundraising costs, in annual reports.

Voluntary reporting and disclosure standards exist for international aid organisations that are members of the Australian Council for International Development (ACFID). Its code requires members to report their fundraising costs in a similar format. This The FIA told us its code may include similar financial disclosure requirements in the future.
You can claim back some of your eligible donations on your tax return if your charity is registered as a Deductible Gift Recipient (DGR). This doesn't affect the money the charity receives, it just means you claim what you're entitled to.

For example, if you donate $400 to an eligible charity (DGR) this year, you could deduct $400 from your taxable income on your tax return. If you pay income tax at 30%, the deduction would be worth $120.

Many donors don't make a claim. Australian Taxation Office figures show that 4.3 million claims for gifts and donations were made in 2004–05, but many more donations are likely to have been eligible for a deduction. There are conditions about what you can claim. Donations must be over $2 and you need a receipt. Some gifts to DGRs — such as tickets to a charity dinner or ball — aren't eligible.

You can check if an organisation is a DGR via the ABN lookup website at abr.business.gov.au. There’s also information about the deductibility of donations at the Tax Office website.

97% of regular donors who responded to our survey agree it’s important that they have information about the effectiveness of their favoured charity’s work, even if they can’t get reliable information about its finances. The good news is that most people who sought this information were able to find it.

The easiest thing to do is to make a call or go online. The most common avenues that survey respondents used for their research were charities’ websites, annual reports and other publications, and by asking a staff member or volunteer.

To get more information:

  • If you’re making a donation to an overseas aid organisation, check that it’s a member of ACFID and more importantly, a signatory to its Code of Conduct. (CHOICE Council Member Robin Brown is a donor representative on ACFID's Code of Conduct Committee).
  • For domestic charities and commercial fundraisers, ask if they’re an organisational member of the Fundraising Institute Australia. The association told us that as a result of our research, it will consider making a list of its organisational members available to the public.
  • Check that the charity is licensed by its state or territory regulator. Each state has different exemptions – in Queensland, religious organisations don’t need to be registered, for example.
  • Consumer Affairs Victoria lists its registered charities (all the national ones are there), with details of cost ratios and use of commercial fundraisers. You may need to ask the charity to explain the figures.
  • Do your own calculations. You’ll need to flick to the end of annual reports for the figures; compare fundraising revenue with fundraising costs and read the notes to financial statements to see how ratios are calculated.
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