Supporting charities and not-for-profits (NFPs) has historically missed a crucial aspect for many years—overheads and indirect costs.
Operating a charity incurs expenses!
While many NFPs rely on volunteer goodwill and donated time, overheads and indirect costs are intrinsic expenses.
According to “Paying What it Takes,” a report from The Centre of Social Impact and Philanthropy Australia, most funders in Australia don’t cover not-for-profits’ indirect costs or overheads. This lack of support diminishes capability and effectiveness within the sector.
The report defines indirect costs as expenses incurred by an organisation that can’t be directly attributed to a specific project.
These costs would likely persist even if the project didn’t exist.
They encompass IT, finance, human resources, learning and development, measurement and evaluation, governance, planning, and compliance.
The report highlights that, on average, the analysed NFPs allocated 33% of total costs to indirect expenses, with significant variations ranging from 26% to 47%.
This leaves some NFPs with nearly half of their outlays unfunded.
NFPs strive to minimise spending and direct raised funds toward their goals. However, every organisation requires internal infrastructure for effective management, governance, and compliance to sustain programs and fulfill its purpose.
Improving NFP Funding
“Paying What it Takes” revealed that securing funding for indirect costs and overheads remains a critical challenge for Australian NFPs. Recommendations to address this issue include:
- Funders, both philanthropic and government, should prioritise impact assessment when evaluating NFPs.
- Low indirect costs don’t signify impactful NFPs, nor do high indirect costs indicate the opposite.
- Effective NFPs incur indirect costs necessary for their impact and need funding support for full-cost operations.
- Understanding impact necessitates investing in measurement systems.
The Real Costs of Running a Charity
Similar to any business, charities and NFPs have essential expenditures to oversee:
- Utilities, premises, and equipment expenses
- Information and communications technology
- Staff recruitment, training, development, supervision
- Workplace health and safety standards
- Financial management and accounting
Depending on their activities, costs can fluctuate.
However, overspending on administration isn’t a prevalent issue in most NFPs; rather, they tend to under-invest in administrative expenses, striving to be prudent stewards of donated funds.
Striking the Right Balance
Balancing frugality with effective fund management is an ongoing task for NFPs:
- NFPs must meet administration standards mandated by law.
- A robust finance system offers insights into fund allocation.
- Tracking categories in accounting software like Xero or MYOB help capture income and expenditure related to various activities, aiding funding acquisition.
Seeking Professional Assistance
Many NFPs lack in-house expertise but outsourcing services ensures proper financial management.
Hopscotch Accounting specialises in not-for-profit accounting, providing services from bookkeeping to high-level financial management, supporting NFPs to focus on their missions.
Overheads and indirect costs are inevitable, but with expert guidance, NFPs can strategically utilise every dollar, maximising their impact.
For more information on expert accounting services for NFPs, Contact Us today.