Assuming that you’ll never be asked how much you spend on administration is naïve—and most charities know that. What’s not as clear is how to handle the question when it comes up. Should you bore people with a detailed reply? Should you dodge the question entirely?

Let’s look at a couple of different approaches.  

Q:  How much does your organization spend on administration?

A:  Actually we spend no money on administration at all.  We run our operations from an abandoned warehouse and send all of our email using the free Wi-Fi at McDonald’s. 

OK, maybe sarcasm isn’t the right approach to answering the question. What about ducking it?

Q:  How much does your organization spend on administration?

A:  Our administration expenses are covered by our investment income, allowing all of our donated funds to be used in our charitable operations. 

Many organizations have used that approach, particularly when they have significant endowments (e.g. universities) or cash flow (performing-rights organizations), but what do you do when your investments lose money, e.g. 2008?

An accountant will tell you that allocating a set of expenses to investment income is arbitrary, unless there has been a specific donor designation to do so. In other words, it is a risky way to go.

How about reality?

Q:  How much does your organization spend on administration?

A:  Spending money on administration is something we watch vigilantly. We constantly look for ways of saving money because every dollar spent on administration is a dollar taken from programs. Currently, our administration and governance costs are $X, which represents Y per cent of the total budget. 

In a word: boring. This won’t stand up to the social media rumors about how much the executive director makes or how much gets spent on lavish board lunches.  It’s the same message that stakeholders have heard for years. 

So, what should a charity do? Here is some radical advice from an accountant: get ahead of the issue and tackle it head on with a series of cost-saving initiatives. At the annual meeting every year, give your treasurer their moment in the sun as they announce the results of last year’s initiative, as well as the new initiative for next year.

What I mean by cost-saving initiatives:

• Vendor pricing – consolidate our purchasing power and renegotiate contracts, e.g. we achieved a 10 per cent cost reduction by accumulating all of the orders from our locations across the country into one contract.
• Manual processes – the search for redundant or time consuming processes, e.g. we increased the number of cases each caseworker can see in a day by replacing the paperwork with a confidential dictation service.
• Human resources – making sure that the pay levels are appropriate for the work being done, e.g. every five years we check the work being performed against local industry averages to be sure that our salaries and wages are appropriate for the work performed. This review ensures that staff are being fairly compensated and that they know it, so that we maintain a stable team with no unnecessary turnover.
• Automation – ensuring that the organization is leveraging staff time (typically the biggest expense) by using technology in an innovative way, e.g. we looked at the number of hours our senior staff was spending creating manual spreadsheets for individual grant reporting and recommend a project system, setting up each grant as a separate project.
• Strategic alliances – team up with other organizations to combine purchasing power and reduce administration, e.g. sharing space and staff in a warehouse instead of maintaining separate facilities.

Q:  How much does your organization spend on administration?

A:  You should see Bob’s report. Our treasurer is a bulldog where saving money is concerned. 

Success!

How do you get there?

Start with the Canada Revenue Agency definition:

• Holding meetings of the board of directors.
• Accounting, auditing, personnel, and other administrative services.
• Buying supplies and equipment, and paying occupancy costs for administrative offices.
• Applying for grants or other types of government funding.
• Applying for gifts from other qualified donees (usually foundations).

Make sure your financial reports highlight the spending in these areas to the people who are in control of these costs.  If the costs are all split up and allocated to different cost centres or departments, it will be difficult to get anyone to take responsibility for them.

Working with the management team, start to plot out several cost-saving strategies and decide which one to focus on each year for the next few years. You want to be sure that you will have something positive to report. Sometimes there are obvious ways to save money, but if the organization is reasonably efficient, many initiatives will take more than one year to show results. The management team needs to understand how serious this issue is to funders, particularly individual donors, so make it one person’s responsibility and be sure that there are regular progress reports.

Finally, please join the conversation by commenting on what has worked (or not worked!) for your organization when launching or reporting on cost-saving initiatives. 

Bill Kennedy is a Toronto based Chartered Accountant with Energized Accounting, focusing on financial and reporting systems in the charitable sector. He blogs at www.EnergizedAccounting.ca/blog/. Find out more at www.EnergizedAccounting.ca; follow Bill @Energized