If no-one pays for overheads, not-for-profits are going under

Paying what it takes: Funding indirect costs to create long-term impact was jointly published by the Centre for Social Impact, Philanthropy Australia and Social Ventures Australia in March 2022 and found that:

• indirect costs are a bad way of assessing a charity’s effectiveness, with insufficient spending likely to reduce performance
• indirect costs for a not-for-profit are on average 33% of total costs, yet most NFPs think funders won’t pay more than 20% (or even less)
• underfunding of indirect costs makes not-for-profits less capable, less effective and more inefficient, with a comparison showing the business sector spends twice as much per employee on training, IT, quality management and marketing
• the reasons for underfunding are complicated but major contributors include the trouble and inconsistency of measuring NFP impact, and the power imbalance with funders.

The study highlighted the vulnerability of a sector in which 35% of organisations had less than a 5% profit margin, and one-quarter were operating on a deficit. Many had dwindling reserves and faced a heavy strain as a result of the pandemic.

It also highlighted the fact that many organisations had been “running lean” for many years, and as a result were vulnerable to economic shocks, a trend dubbed “the non-profit starvation cycle” by overseas studies.

The report’s authors hope to use the study to create an argument for change, educate funders and start a campaign to address the funding shortfall.

Our Community has backed the findings, with executive director Kathy Richardson saying the organisation has been acutely aware for many years of the battle by not-for-profits to generate the funding they need.

“Through our grants distribution platform, SmartyGrants, our organisation has been a strong advocate for funders to include unrestricted funding as part of their arsenal,” Ms Richardson said.

“But we also realise that there has been persistent pressure not to spend money on “overheads”, with our own study (from seven years ago!) showing that 56% of organisations feel pressure to keep overheads to a minimum, and half saying the most pressure came from their own boards.”

Ms Richardson argued many people were just not thinking straight about how not-for-profits actually use their money.

“Money going ‘to the cause’ and money going to ‘expenses and staff salaries’ are exactly the same thing. The only exception is for charities that are run exclusively by volunteers and have every cent of their costs – computers, printers, ink, paper, insurance, compliance, office space – paid for by the Magic Money Fairy. I’m not aware of any such charities.”