Is the starvation cycle here to stay?

I have run charities that depended on fundraising and philanthropy to maintain good-quality programs and services.

The discretionary fundraising revenue was used to fill the gap between what was provided by government and other funders, and what it actually took to fulfill the contracted programs and services.

On more than one occasion, I was told that it was this “top up” capacity that made our submissions and tenders more compelling for potential funders.

In some cases, the charity was successful in gaining government contracts and services only because our fundraising enabled us to accept low paying government contracts and make them work.

This approach to government contracting was often framed as being about saving the government money and delivering increased value for taxpayers (ministers like this idea). It was also about having a significant competitive edge against other charities seeking the same funding.

The Social Ventures Australia report Paying What It Takes makes the following important points about the way charities and not-for-profits tend to manage their finances:

• Many charities operate with thin or no margin and did so even before the covid crisis
• Many charities operate with limited reserves.

Australian charities and not-for-profits are not alone. These financial norms in our sector are also norms for many not-for-profits around the world.

Researchers in the US examined the finances of more than 4,100 not-for-profit organisations across a period of 30 years, analysing and testing some common nongovernment financial norms including levels of overhead costs, reserves, sources of funding, and expenditure on fundraising activities.

This was their finding:

“The norms we studied are of the less-is-better variety... Examples of these norms include getting revenue from many different sources, avoiding debt and scrimping on expenses like information technology and office space that are known as overhead costs.

“We found that charities that don’t embrace these common financial norms end up spending about 53% more money to advance their missions over a 10-year period than other charities.

“Another research team assessed the wisdom of a rule of thumb that charities should maintain as little as three months’ worth of financial reserves. They found no evidence supporting it. To the contrary, they found that having so little cash on hand could endanger many organizations.”

These findings are not surprising to any of us working in the sector.

If a charity or not-for-profit has no discretionary income, and limited reserves, it’s going to be difficult to thrive as an organisation, to invest in innovation, in better evaluation, documentation, marketing and promotion, recruitment and staff development, climate adaptation and energy transition, technology and cybersecurity, all of which can be vital to improving programs and delivering greater benefit to the communities being served.

Some have argued that the reason charities and not-for-profits have cut back on expenditure in these vital areas is to satisfy the demands of funders who are reluctant to pay for what is often termed administrative expenditure or overheads. This may be true.

My experience is that most charities and not-for-profits cut back their overhead expenditure because they are committed to their purpose, to the communities they serve, to the programs and activities they provide.

If it is a choice between cutting an IT staff member and diminishing organisational IT capacity, or losing an employee involved in direct program delivery, who is most likely to be leaving the organisation?

Regardless of the reason, the reality is that many charities and NFPs operate permanently in what is sometimes called the starvation cycle – continually cutting back on organisational infrastructure and capacity to ensure there is enough funding for programs to remain viable.

The Paying What It Takes report found that anything less than 29% expenditure on what is commonly called overheads is probably unrealistic and may even damage the organisation:

“The average indirect costs of the not-for-profits analysed was 33% of the total costs, with significant variation between 26% and 47%. This is comparable to the minimum of 29% indirect cost funding found in a US study of 130,000 charities.

“By contrast, funding agreements often only included indirect costs of between 10% and 20% of overall costs. A significant proportion of not-for-profits stated that they underreported their indirect costs to funders due to a pervasive belief that funders are unwilling to fund more than 20% of indirect costs.”

There are far too many variables in charity and NFP performance, impact and effectiveness for simple generalisations and measures relating to overhead expenditure or capital reserves to provide genuine insight or understanding of organisational performance. There really are no set rules.

What we do know is that all too often it is a false economy to cut back on organisational capacity.

It’s not unrealistic in 2023 to expect that most charities and not-for-profits employing staff should, as a minimum, be able to provide well managed data security, evaluation and program improvement, staff training and development, dignified surroundings in appropriate locations, and accurate and timely monitoring of activity and performance.

Charities and not-for-profits should not have to rely on fundraising to make government contracts workable.

And yet, as competition for fundraising and government contracts increases, and costs of living bite into charities and not-for-profits in so many ways, the doing-more-for-less demands seem to be increasing.

The unfortunate reality is that many charities and not-for-profits have little choice if they want to continue offering their programs and services.

For as long as governments and other funders are not prepared to pay the full cost of providing quality programs and services, charities and not-for-profits will have to either rely on obtaining other sources of income to make under-resourced funding agreements workable or cut back in essential areas of organisational capacity.

The starvation cycle is alive and well in Australia, and unless there is a genuine commitment to change, it will be staying with us for some time.

David Crosbie has been CEO of the Community Council for Australia for the past decade and has spent more than a quarter of a century leading significant not-for-profit organisations, including the Mental Health Council of Australia, the Alcohol and Other Drugs Council of Australia, and Odyssey House Victoria.