How much should charities spend on overheads?

‍The vast majority of donors that I have encountered over the years have only one criterion for their charitable giving - how much of my donation is swallowed up by overheads.  The perception is that the higher the admin cost, the lower the money spent directly on services and so less ‘good’ the charity is doing for my contribution.

‍ This perception is perpetuated by regular media headlines - ‘Charitable Christmas giving: How much of your donation goes to those who need it?’, ‘Millions in charity donations ‘wasted’ on administration costs, red tape’, and ‘Millions in donations blown on administration costs’.

‍The reality is that all organisations, be they for-profit or not-for-profit, need to spend on office rent, human resources, training, accountants, information technology and administration to manage their compliance with laws and regulations, governance requirements, information technology systems, cyber security, risk management, staff and financial management.  After all, you want your charity to be well-managed, financially accountable, cyber-safe, and legally compliant.

‍Although a national standard chart of accounts has been developed by the sector and the ACNC, there is no requirement to use it, no accepted accounting definition of what constitutes administration costs, and no external audit sign-off to verify their accuracy.  As charities include different costs in administration, no direct comparison is therefore possible. 

The administration cost ratio is even more variable due to the revenue amounts chosen for the calculation. For instance, if the ratio is calculated to total revenue from the financial statements, including non-fundraising income such as government grants, the ratio reported bears little relation to how much the donor’s contribution was spent on beneficiaries.

‍As the ACNC notes ‘assessing and comparing charity administration costs is difficult and it can be misleading’[i].

The recent Blueprint Expert Group considered an action to update National Standard Chart of Accounts and embed it in accounting software, but the improvement did not make it into the final 2024 Not-for-profit Sector Development Blueprint[ii].

‍Given the fierce competition for the dollar, charities face pressure not to include the full cost, including overheads, as this could lead to being outbid on costs, turning away funders, and undervaluing their ask. The pressure by donors and funders on charities to incur low administration costs is called the nonprofit starvation cycle[iii] - a vicious cycle that fuels the persistent underfunding of the capacity of charities.

‍The recent Paying What It Takes report by Social Ventures Australia and the Centre for Social Impact confirmed that charities are underinvesting in critical capabilities due to a pervasive belief that funders are reluctant to provide the full financial support needed to create impact. The report also found that charities that spend less on indirect costs are not necessarily more efficient nor more effective than those that do not. Indeed, there is clear evidence that spending insufficient resources on indirect costs can potentially reduce overall effectiveness[iv].

The report found that ‘the average indirect costs of the not-for-profits analysed were 33 per cent of the total costs, with significant variation between 26 per cent and 47 per cent. This is comparable to the minimum of 29 per cent indirect cost funding found in a US study of 130,000 charities. By contrast, funding agreements often only included indirect costs of between 10-20 per cent 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 per cent of indirect costs[v].

To compound the issue, a 2025 study has found that ‘current Australian governments do not provide adequate funding for services procurement; nor do they provide adequate indexation for ongoing contracts and service delivery or adequate capital inputs to meet policy and regulatory change’[vi].

[i]https://www.acnc.gov.au/for-public/understanding-charities/charities-and-administration-costs

[ii] Blueprint Expert Reference Group (2024) Not-for-profit Sector Development Blueprint, p.78, action 73

[iii] Goggins Gregory A & Howard D (2009),  The Nonprofit Starvation Cycle, Stanford Social Innovation Review, Fall 2009

[iv] Social Ventures Australia and the Centre for Social Impact (2022) Paying what it takes: funding indirect cost to create long-term impact, Social Ventures Australia at https://www.socialventures.org.au/wp-content/uploads/2024/07/Paying-what-it-takes.pdf

[v] Ibid p.3

[vi] Gilchrist D.J., & Perks B (2025) Real Costs, Real Impacts: A Path to Social Services Sustainability, Centre for Public Value, UWA Business School, Catholic Social Services (Australia) Ltd, Canberra at https://www.uwa.edu.au/schools/-/media/centre-for-public-value/resources/250315-real-costs-real-impacts-final.pdf

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