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Why are comparisons not legitimate?
In the U.K. registered charities must file detailed annual accounts with the Charity Commission and these are prepared in accordance with the most recent accounting SORP (Statement of Recommended Practice).
At face value you might presume that this would provide a reasonable basis for comparison between organisations, but there are a number of reasons why this is not the case.
At face value you might presume that this would provide a reasonable basis for comparison between organisations, but there are a number of reasons why this is not the case.
The way charity accounts are prepared - The first is the manner in which charity accounts are presented. Unlike business organisations the accounts are compiled following the principles of ‘fund accounting’ (i.e. one organisation may comprise a number of funds) making the application of a standard ratio analysis problematic (Palmer and Randall, 2002).
There are also issues of variation in accounting policies and the definitions of key categories. Hyndman and McKillop (1999) argue that these problems are so acute that the use of ratio analysis based on financial accounting data is a nonsense. As Pharoah (1997) notes, accounting practices can vary substantially from one organisation to another and what may be classified as fundraising expenditure for one organisation may be classified as charitable expenditure by another.
‘Feasibility work (for example), carried out as part of the preparation for bids for large capital grants can be considered as direct charitable expenditure and not as a fundraising cost’ (Pharoah 1997, p168).
Education versus fundraising cost - Similarly, many organisations have a mission which requires them to involve themselves not only in benefiting the members of a certain target group, but also in educating the general public about the very particular needs thereof. Thus a charity such as the Terrence Higgins Trust will not only try to alleviate the suffering of those suffering from HIV infection or AIDS, it will also seek to raise the public awareness of AIDS and to eliminate many of the common misconceptions associated with the illness.
Those organisations that feel it important to develop such a role, face a dilemma in accounting terms over the manner in which they report the costs of awareness generation or educational activity. Since there are often substantial benefits to be gained by combining such activities with those specifically designed to raise funds it often becomes impossible to distinguish between them.
In these circumstances charities must decide quite arbitrarily whether to show the costs against fundraising or as direct charitable expenditure, a decision that will obviously have profound implications for the subsequent calculation of fundraising ratios.
Fundraising and awareness - Allied to this, many charities now adopt the practice of ‘awareness recharging’ where a proportion of the cost of fundraising (typically 10-20%) is taken out of fundraising and shown as a direct charitable expenditure, since it is argued that one of the purposes of fundraising communications is to raise an awareness of the cause. This, they would argue is a legitimate goal of the organisation and hence it is appropriate to make this adjustment.
Fundraising and the category of funds raised - The structure of an organisation’s funding can also have a dramatic impact on these figures. Those organisations that are fortunate enough to receive a small number of grants on an annual basis and derive the lions share of their funding from these, will have a significantly better cost structure than those organisations involved in soliciting funds from the general public. Not only will greater numbers of staff be required to administer fundraising from the general public, but the costs of communicating with an often diverse population of donors can be substantially higher (Sargeant and Kaehler 1998). Moreover the sheer volume of transactions can add quite significantly to IT, data processing and even banking costs (Hind 1995).
Fundraising and legacies - Using fundraising ratios to compare between organisations could also be criticized on the grounds that such figures (unless averaged over a three to five year period) will fail to take account of large one-off contributions such as a particularly large grant or a significant legacy. A charity that might otherwise exhibit rather poor patterns of performance can thus overnight be transformed into one of the most efficient in the sector.
There are also issues of variation in accounting policies and the definitions of key categories. Hyndman and McKillop (1999) argue that these problems are so acute that the use of ratio analysis based on financial accounting data is a nonsense. As Pharoah (1997) notes, accounting practices can vary substantially from one organisation to another and what may be classified as fundraising expenditure for one organisation may be classified as charitable expenditure by another.
‘Feasibility work (for example), carried out as part of the preparation for bids for large capital grants can be considered as direct charitable expenditure and not as a fundraising cost’ (Pharoah 1997, p168).
Education versus fundraising cost - Similarly, many organisations have a mission which requires them to involve themselves not only in benefiting the members of a certain target group, but also in educating the general public about the very particular needs thereof. Thus a charity such as the Terrence Higgins Trust will not only try to alleviate the suffering of those suffering from HIV infection or AIDS, it will also seek to raise the public awareness of AIDS and to eliminate many of the common misconceptions associated with the illness.
Those organisations that feel it important to develop such a role, face a dilemma in accounting terms over the manner in which they report the costs of awareness generation or educational activity. Since there are often substantial benefits to be gained by combining such activities with those specifically designed to raise funds it often becomes impossible to distinguish between them.
In these circumstances charities must decide quite arbitrarily whether to show the costs against fundraising or as direct charitable expenditure, a decision that will obviously have profound implications for the subsequent calculation of fundraising ratios.
Fundraising and awareness - Allied to this, many charities now adopt the practice of ‘awareness recharging’ where a proportion of the cost of fundraising (typically 10-20%) is taken out of fundraising and shown as a direct charitable expenditure, since it is argued that one of the purposes of fundraising communications is to raise an awareness of the cause. This, they would argue is a legitimate goal of the organisation and hence it is appropriate to make this adjustment.
Fundraising and the category of funds raised - The structure of an organisation’s funding can also have a dramatic impact on these figures. Those organisations that are fortunate enough to receive a small number of grants on an annual basis and derive the lions share of their funding from these, will have a significantly better cost structure than those organisations involved in soliciting funds from the general public. Not only will greater numbers of staff be required to administer fundraising from the general public, but the costs of communicating with an often diverse population of donors can be substantially higher (Sargeant and Kaehler 1998). Moreover the sheer volume of transactions can add quite significantly to IT, data processing and even banking costs (Hind 1995).
Fundraising and legacies - Using fundraising ratios to compare between organisations could also be criticized on the grounds that such figures (unless averaged over a three to five year period) will fail to take account of large one-off contributions such as a particularly large grant or a significant legacy. A charity that might otherwise exhibit rather poor patterns of performance can thus overnight be transformed into one of the most efficient in the sector.
