A note on administrative and fundraising costs
Many donors and funders look to measures of administrative efficiency (such as administrative cost) when deciding which charities to fund. NPC does not do this for two reasons:
Firstly, administrative cost is not a predictor of results. In fact, higher levels of administrative spend may lead to improved results. For example, a charity offering legal advice to disabled people and their families currently employs solicitors who each serve approximately 400 clients per annum (by phone, email or in person). In order to grow, this charity could either raise funds to employ another solicitor (at £50,000 per annum) or an administrative assistant (at £30,000 per annum). The administrative assistance would increase administrative cost, but by booking appointments, following up and filing notes, it would also free up the time of the existing solicitors to serve more clients and deliver more results.
Secondly, comparisons on the basis of administrative costs are flawed. Despite guidelines regulating the reporting of administrative costs, there is wide variation between the methods used, and therefore between the costs reported. For example, one charity might report the salary of an administrative assistant as an administrative cost, while another might report it as a cost within the delivery of its charitable activities. In effect, reported ratios of administrative spend are so arbitrary as to be misleading without a detailed investigation of the underlying cost elements.
Fundraising Costs raise similar issues. These costs tell us nothing about results, and comparisons between them can be misleading. Fundraising Costs vary widely between charities of different sizes, between those working in different areas of social welfare and between those using different fundraising mechanisms.
These problems mean that it is dangerous to use reported administrative or fundraising costs as the basis of any judgement of effectiveness. While NPC considers financial indicators during the analysis of a charity's operational efficiency, this is always within the broader context of the charity's results.