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Don't Judge A Charity Based On Administrative Costs

Tim Parker

It's not as if you have extra money to give away. You have debt to pay off, kids who will go to college and retirement accounts that need funding. You do not have money lying around to throw away. When you give to a charity, you need to know that the money you really can't afford to give up is ultimately making it to somebody who really needs it. This is not being unreasonable. Like others recently surveyed, you might agree with up to 23 cents of every dollar you donate going to administrative costs, but anything above that is a non-starter. This is when your inner conspiracy theorist kicks in. You wonder: "How is my money being used, anyway?"

You go online only to find out that the money you could have put into your child's college fund helps pay the CEO far more money than you make in a year. You are outraged! However, should you be? Some experts caution against judging a charity by its numbers alone.

The Numbers Might Be a Lie
Administrative costs expressed as a percentage of the fair market value of donated items can be terribly (sometimes unintentionally) misleading. A story that appeared on The Huffington Post provides a great example of how these figures can be deceptive. The Super Bowl has a winning and losing team, but shirts, hats, and other paraphernalia are made ahead of time for both teams of potential Super Bowl Champions. Companies and organizations donate the "We won the Super Bowl!" swag for the losing team to charities that ship it overseas.

In this case, World Vision reported paying $1.82 per shirt in administrative costs to get the shirts into the hands of those in developing nations that needed clothing. The NFL valued the shirts at $20 each. A little division shows that the administrative costs come in at 8.3%, according the report. However, the fair market value of these shirts is supposed to be based on what somebody would pay for it.

Would you pay $20 for a shirt that says the team that actually lost the Super Bowl, won it? If sold in the U.S., the shirt would likely be in a bargain bin for considerably less than $20. So maybe the fair market value is actually $5? If that's the case, the administrative costs are actually 26%. Did World Vision have administrative costs of 8.3% or 26%? If you choose to donate based solely on reported administrative costs, be aware that those numbers can vary widely.

Think Like a Business
Charities know that there are well-meaning websites that try to protect people from charities that are doing little good for the cause they claim to support. They know that the headline number is the administrative costs and most people will not dig into the charity to see if higher administrative costs are justified. According to a 2001 survey from the Better Business Bureau, 79% of participants said they want to know what percentage of their money went to the cause. For that reason, many charities try to run their operations spending as little on administration costs as possible.

But is that really what you want from a charity? Do you go to the cheapest doctor or an unscrupulous lawyer? Do you expect that the cheapest restaurant will have higher-quality food than the more expensive one down the road? This, according to some experts, is the problem with judging a charity solely by its administrative costs.

A blog featured on The Harvard Business Review points out that charities that try to spend less on administrative expenses tend to have inferior programs. Charities are not immune to the same forces that challenge for-profit businesses. Spending more to get a more talented and experienced charity CEO as well as staff members with better skills will likely produce more donations and make a larger scale difference than trying to run leaner, argues the report. Hiring better people makes for better results.

Volunteers are well meaning but may lack the expertise to be truly effective. A Cracked.com article went so far as to say that when people throw their money behind charities solely based on low administrative costs, they are encouraging that charity to cut corners.

The Bottom Line
You should not ignore administrative costs. There are certainly bad charities that do not deserve your time or money. But looking solely at one metric, one that is calculated using subject measures, is not the way to evaluate a charity. If you don't know who or what to believe, keep your money local. Donate directly to families or causes that you know are truly in need. Donate with food, clothes or even your time. Maybe a divorced mother desperately needs her home or car repaired. You do not have to give to charitable organizations in order to be charitable. It is your money; donate it in a way that makes you feel empowered.

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