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The cost of doing good

Donors often wonder how much of their money goes directly to the causes they support. But that may not be the question to ask.

By Trisha Elliott

Canada has more charitable organizations than Sears outlets, ice arenas and Tim Hortons restaurants combined. And despite its shoestring image, the sector carries more economic clout than the automotive or manufacturing industry, representing $79.1 billion or 7.8 percent of the GDP. An estimated 161,000 organizations strong, the nation’s charitable and non-profit sector is the second largest in the world and shows no sign of decline: about a thousand new charities are registered in Canada each year. 

With all of those charities vying for a share of your dollars, knowing how to evaluate a cause is critical. But asking “What percentage of my donation is going directly to the cause?” won’t necessarily elicit a meaningful answer.

While the Better Business Bureau and the Canada Revenue Agency aren’t concerned when a charitable organization spends up to 35 percent of its generated revenue on fundraising, Charity Intelligence Canada, an Ontario-based watchdog organization, raises its eyebrows when fundraising campaigns exceed 32 percent of generated revenue. “This creates a vicious marketing cycle, necessitating that all charities raise their profile in a crowded market and spend more on fundraising to attract a scarce resource,” the organization states on its website.

Most Canadians feel that charities spend too much on fundraising, according to a recent study by the Muttart Foundation. But just how much is too much is a matter of perspective.

Vic Murray, an adjunct professor at the University of Victoria, is critical of charitable watchdogs. “Some watchdog organizations like to see [the cost of fundraising] at 10 percent,” he says. “Any more, and they tend to judge you as inefficient. But when you get into looking at the details and appreciate the amazing array and diversity of charities, there is often a perfectly good argument why those charities exceed those ratios. You can still be a really good charity, but you have to spend that kind of money to raise money.”

 If a charity’s cause lacks broad appeal, attracting donors could require more effort and expense. “There is a significant correlation between the popularity of a [charity’s] cause and the amount of work it has to do to raise funds,” says Ken Mayhew, chief development officer of the Multiple Sclerosis Society of Canada. He explains that celebrity support for a cause, the number of lives affected and public perception have an impact on popularity. “Many people are affected by breast cancer and are tuned in to environmental issues. But other causes are less trendy, more obscure and not as understood, like leprosy or mental health. These types of causes might have to spend more on fundraising because they aren’t as popular,” says Mayhew.

Overhead is also an issue. Karen Wilson, senior vice-president of KCI Ketchum Canada, a fundraising and consulting firm for non-profits, says the differing set-ups of registered charities need to be taken into account when comparing numbers. “For example, hospital foundations might be located in a hospital so they don’t have rent to pay, whereas other smaller charities might have to pay rent and include it in administration costs. Is it fair to say that one is not as careful with their money when their expenses are naturally higher?” asks Wilson.

Popularity and legitimate overhead aren’t the only factors that can drive up a charity’s administration and fundraising costs. The age and size of both the organization and its target constituency, the level of competition from other charities, the knowledge and skill level of staff, and the age of the fundraising department can also affect expenditures.

Some fundraising ventures take years to show returns. Planned giving and major gift campaigns, for example, might lose money in the short term but generate significant returns in the long run. Wilson says that fundraising expenses can vary from year to year within an organization. “A charity might choose to do an acquisition mailing one year. It’s more expensive to acquire new donors. You might have to buy mailing lists, or send two or more mailings just to get names. There isn’t a lot of financial return on that initial investment, so the fundraising expenses would appear higher. But that doesn’t mean that you shouldn’t do an acquisition mailing or that an organization that does them is being irresponsible.”

Even if low fundraising ratios did signify a well-run charity, charitable organizations in Canada don’t necessarily add up administration and fundraising expenses in exactly the same way. There is no unified national standard for calculating the cost of fundraising. 

Charities are required to file financial information annually with the Canada Revenue Agency through its Public Information Return (Form T3010). While a more comprehensive form was issued in 2009, a recent study by Imagine Canada uncovered anomalies in the data. Analyzing returns filed by 61,131 Canadian charities, researchers found that 36 percent of charities studied had at least one “readily identifiable error” on their forms. Even more troubling, the report noted, only 27 percent of charities reported fundraising costs when a full 85 percent claimed to have received money from tax-receipted gifts or fundraising revenues.

Increasingly, donors, funding bodies and philanthropists are sizing up charities not by the amount of fundraising dollars spent but by the difference their dollar makes. And quaint stories about changed lives won’t do. Donors want hard data to prove they are getting the best bang for their buck.

This focus on results has many charitable organizations scrambling to show that what they do works. Adopting an “outcomes approach” or “measuring benchmarks” is the latest buzz in the sector. Bonnie Morris, vice-president of resource development for United Way Canada, says that United Way shifted to such a model in 2003. 

“It’s not just about the cost of fundraising anymore, it’s about results — tangible outcomes in communities,” says Morris.

There are many different methods to measure a charity’s performance, but they all aim to demonstrate how effective an organization has been in achieving its goals. Some charities have embraced a performance measurement tool to help them advance their mission; others are grudgingly adopting one.

Not everyone is keen on number-crunching their cause. While proponents argue that performance measurements keep their organization focused and goal-oriented, detractors complain that the time and effort it takes to develop the model, implement it, and gather and monitor data is costly and draining. There is also concern that if the models are used for funding purposes, investment might be driven to programs that can produce easily quantifiable results. 

Murray says that evaluating organizations with very broad goals is challenging. “How does one evaluate the goal of the Scout movement to develop the potential in youth and create better citizens? It is not impossible to measure such goals, but it is easy to see how any given set of measures might be seen to be inadequate. And developing valid measures of these kinds of things is technically very challenging, often costly and certainly subjective,” he writes in his recent book, The Management of Non-Profit and Charitable Organizations in Canada.

Given all of this uncertainty, is there any way donors can know if they are contributing to a good cause? 

Ken Mayhew says that’s a difficult question, and perhaps too negative. “Surveys show that the majority of non-profits enjoy public trust. They are often incredible organizations that stretch a dollar further than what most of us in our personal lives do.” He adds that organizations should be open and transparent: “If you ask questions about financial matters, make sure you feel comfortable with the answers. But please don’t think that if they spent 30 cents on the dollar or even 45 cents that they aren’t good organizations.” Mayhew encourages would-be donors to get to know charities, to drop by and ask them “why they do the work that they do, what impacts they are having and what progress they are making.” As he points out, “Efficiency and effectiveness aren’t mutually exclusive. Good organizations are both.” 

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