Heresy from an accountant; beyond financial reporting for non-profits

This might sound like heresy from an accountant, but there is much more to good reporting than pounds and pence and it is clearly not possible to form valid conclusions about a charity’s effectiveness based only on its published financial statements. Notwithstanding this it is surprising that there are so many comparator analyses and spurious league tables based entirely on financial information.

Cost Ratios

There is too much hype and pretended intelligent analysis on charities that is based on the ubiquitous comparison of cost ratios; in particular, cost ratios on fundraising.

There are good reasons why different charities may have different cost ratios. The reality is that with most forms of fundraising there is very little correlation between what is reported as fundraising costs in a year and the actual amount raised in the year.

The most extreme example is a legacy campaign where the money is spent in one year and income comes in much later. Even direct mail campaigns show little correlation between reported income and expenditure. Cold mailings lead to poor cost ratios, even negative cost ratios, but they are still important as they generate new donors and ratios are improved in future years.

The financial reporting date can also have an impact. Consider street or house-to-house fundraising where the donor signs up to pay a fixed amount per month. The mechanics usually involve an upfront payment to an external fundraising company which usually equates to several months income. If this campaign is run within six months of the year end, the costs charged will inevitably exceed the income recorded. The following year there will be more income but no related donor acquisition costs.

Cost ratios are influenced by a number of factors and fundraising mix is an important one. For example, legacy fundraising has the lowest cost ratios whilst cost ratios for special event and dinners are usually much higher. However, some types of charities, such as medical charities, do better at raising legacies than others such as international aid charities, and this has little to do with their fundraising skills or effectiveness. Therefore some types of charity will have an inherent fundraising mix that predisposes them to a lower fundraising cost ratio.

Staff costs

The league tables often attempt to compare staff average costs. This can only be done by dividing the total staff costs in the accounts by the number of staff - but some charities include part time staff and overseas staff in their numbers and other don't - so any comparison is quite spurious.

More importantly some commentators try and make the public believe that high total staff costs are indicative of waste. This is far from the case as many charities employ their own staff to deliver services. Others may work with partner organisations that deliver the services. Some charity operations are labour intensive and some others say campaigning or grant making may require less staff.

Similarly, comparing charity reserves in this simplistic manner is quite misleading. For example a charity may get most of its income from holding investments and would have to have high reserves to continue to sustain its income. Another charity may have agreed to fund a researcher for three years and needs to know it has the reserves to do this. It is for this reason that the Charity Commission does not try to set a reserve level.

"While overhead costs are relevant it is time that donors and commentators shifted the emphasis from administrative and fundraising costs to the outputs, outcomes and impact arising from the donations."

Reporting on what matters

For many charity donors a key issue is how charities report and account for charitable expenditure. While overhead costs are relevant it is time that donors and commentators shifted the emphasis from administrative and fundraising costs to the outputs, outcomes and impact arising from the donations. The Statement of Recommended Practice on Accounting and Reporting by Charities has recognised this and has focused on the need for better narrative reporting and many of our well known charities have produced useful and interesting Annual Reports that report on plans, achievements and successes, and demonstrate what the charity is actually doing.

The financial statements themselves focus on inputs. These are the resources that contribute to a programme or activity, including income, staff, volunteers and equipment. Of course inputs matter and publications such as "Top 3000 Charities" provide useful information without trying to make spurious comparisons.

Most input values are reflected in the accounts but certain inputs such as volunteer time are not. Inputs should link to activities as activities are what an organisation does with its inputs in order to achieve its mission. In many cases these can inform the expenditure headings in the Statement of Financial Activities and inform the reporting of outputs and outcomes. Due to the use of out of date chart of accounts some charities have had difficulty in linking inputs to activities. Inputs are often easy to reflect in terms of pounds and pence and therefore commentators seize on them.

Outputs, outcomes and impacts

We could do with more consideration of outputs, outcomes and impacts. Outputs are countable units, and are the direct products of programmes or an organisation’s activities. They could be children immunised, animals relocated, classes taught, training courses delivered or people attending workshops. In themselves they are not the objectives of the organisation but some reporting appears to be confusing these with objectives. Outputs are often quantifiable and lend themselves to tables and charts and increasingly they are being used by charities.

Outcomes are the benefits or changes for intended beneficiaries. They tend to be less tangible and therefore less countable than outputs. Outcomes are usually planned and are therefore set out in an organisation's objectives. The Trustees' Report should highlight outcomes. It is sometimes difficult to properly define outcomes and to be able to claim them because of a charity's activities. However, this should not prevent the reporting of outcomes.

Impact is all the changes resulting from an activity, project or organisation. It includes intended as well as unintended, negative as well as positive, and long-term as well as short-term effects. Impact reporting is difficult and many of the “impact reports” are in fact reporting on outcomes but most make commendable efforts in identifying, recording and reporting on what matters. The mindset should be:

• What did we set out to do?
• What did we do?
• What are we planning to do?

We need more reporting on what is being achieved by the UK charity sector and hopefully this will foster more sustained giving and support in addition to the much needed responses to emergencies. The task of setting priorities for charitable action itself will remain as difficult as ever, matching the demands to satisfy short term needs against pressure for the resources required to achieve long term solutions.