Guide to donating to charities

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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.

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