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  1. Wealth
May 2, 2013

Charities With High Admin Costs Aren't Money Wasters

By Spear's

One charity promises that ’18 of your ’20 donation will go directly to its beneficiaries, the other says ’19 will. Which would you choose to support?

Whether you’ve got £10 or £10 million pounds to give to charity, most people hope that their donation will make a difference — but this can often be hard to measure. A simple, seemingly intuitive way is to consider what proportion of your donation will actually go to the end beneficiary, and how much will be spent on the charity’s admin and fundraising costs. 

Say for instance, you want to donate £20 towards a charity delivering emergency aid to Syria. Would you rather go for a charity that promises that £19 of your donation will be spent directly on that emergency aid, with the rest used to cover the charity’s core costs, or the charity that promises that £18 will reach Syria? 

Most would go for the first option, but new research conducted by Giving Evidence (directed by Spear’s contributor Caroline Fiennes) and GiveWell suggests that could be the wrong choice. 

GiveWell is run by former Wall Street analysts, who recommend charities on the basis of whether they have a clear need for money, if they deliver impact, and if their activities are cost-effective. It has found that the charities it recommends tend to spend an average of 11.5 per cent of their costs on administration, while charities that GiveWell reviewed but didn’t recommend spent less: 10.8 per cent on average.

This trend is even more pronounced for GiveWell’s 2009 figures, when it ranked charities into four categories — then, the highest rated charities spent 16% of their budgets on admin, while the lowest performing spent just 9.5%. (see graph above) 

This research not only challenges most donors’ instinctive beliefs about charitable giving, but also conflicts with government thinking on the issue: the Public Accounts Committee has suggested that charity’s admin costs should be capped.

If you think about it, the fact that a charity spends more on admin  doesn’t necessarily imply that it is less effective than one with lower overheads. A charity that spends more money on monitoring the effectiveness of its programmes, for instance, might have higher overheads than one that doesn’t — but the money it does spend on beneficiaries is also likely to be spent more effectively. 

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Then again, high admin costs isn’t a guarantee of effectiveness — the difficulty for a donor is that it’s hard to know if charities are spending their admin costs wisely and sensibly, or if they are just run inefficiently. If you’re donating £10 million pounds, it’s fair to ask charity to justify their admin spending, if you’re donating £10 you probably have to take a bit of a leap of faith.

For many, charitable giving is an instinctive, natural reaction — but choosing who to support requires a little more thought.

Read more by Sophie McBain

Read more on Philanthropy


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