Helen Irvine reveals why NFPs need to communicate their expenditure stories

What inspired this study?

There’s been an emphasis in the media and academic literature on ratios relating to fundraising and program expenditure and the way that not-for-profits (NFPs) spend their funds. Often, these ratios tend to be blunt instruments creating decontextualised data, which can portray an incomplete picture lacking resource allocation reasoning. This, coupled with mounting media attention and concerns from the general public about how and where the Australian NFP sector allocated its funding, were the primary motivators for this study.

Do you think NFPs spend unnecessarily on fundraising and administration activities, or do the media and the public need to be educated as to why allocating resources to these areas is necessary?

The popular belief that NFPs can run on little to no funding is untrue – they now have more layers of accountability and reporting requirements, which adds to their administration expenditure. For NFPs to remain afloat, they need to allocate funding into administration efforts otherwise they won’t be around in years to come.

The study’s co-author, Christine Ryan and I looked at what organisations actually said in their annual reports about their expenditure: could they actually explain what they were doing with their programs? We found that some did this well, but mostly they didn’t discuss the financial aspects.

During the study we had a few organisations that researched on a few of the programs that they were undertaking and how much they cost. Most, however, focused on the program itself and what it entailed but didn’t discuss how much it cost to run. Some organisations may have a particular reason for having higher fundraising expenditure during one period – they may be changing their fundraising methods or programs.

We are not suggesting that funding should be allocated in a particular way – this is up to the individual organisation. We are suggesting that resource allocation needs to be reported to provide transparency and educate the community – they need to understand how much it costs to run a NFP.

Society’s negative perception of NFP expenditure makes revealing information about expenditure a daunting and courageous task. NFPs don’t want to give the impression that they generate a lot of funding because people will not want to give to them, conversely, they don’t want to appear not to receive enough funding as people won’t deem them worthy enough to give to. They need to walk a very fine line of being wealthy enough that people want to give to them, but not too wealthy that people think they are over funded.

Do you believe that a multi-channel approach to revealing NFPs’ expenditure is required?

Yes, NFPs need to communicate their expenditure stories through narrative as well as through traditional financial reporting methods. This paints the big picture, showing the public what their vision and mission is.

Do you believe that the Australian Charities and Not-for-profits Commission (ACNC) will help create a better relationship between the Australian public and charities?

Should the ACNC continue to be a fully funded governing body for NFPs, it will play a key role in educating the community. At present it appears to be providing a higher level of insight into reporting by using both qualitative and quantitative data, not just blunt ratios, to measure expenditure. An important role of the ACNC could be to develop a philanthropic and well informed culture amongst the Australian public.

Do you think there will continue to be resistance from Australian charities to report to the ACNC?

The resistance from NFPs appears to be lifting – initially they were nervous as they didn’t know what to expect, however now the ACNC appears to be developing credibility amongst the NFP community. From my understanding, feedback from NFPs has been positive.

With the new government, there is added uncertainty now for the ACNC as to what level of funding it will receive, and if in fact it will still be in full effort – this may create some concern.

Due to the competitive environment of the NFP sector, do you think the need for resource allocation to fundraising initiatives is more necessary than ever?

It costs money to raise money – it’s a strategic board decision.

The mode of fundraising is just as important as the cost – the organisation could go for the cheapest form of fundraising but not generate a profitable return, making the campaign ineffective and therefore a waste of resources. NFPs also need to ensure that donor fatigue doesn’t occur – they need to keep innovating and developing new fundraising methods to keep donors attached to their cause. Strategy is the key.

Boards need to strategically manage their viability in terms of their income streams; they need to seriously consider the breakdown of where the organisation’s funding will come from. It’s a bigger question than just spending on fundraising – this is just one plank in an overall strategy about ensuring the sustainability of the organisation.

You reported that the lowest income groups relied most heavily on fundraising income. Do you believe they need to keep spending on fundraising initiatives to remain successful and gain traction?

It needs to be put into the context of the organisation’s overall sustainability – what kinds of income streams is it going to look to in the future. The higher the quality of the organisation’s board members, the more likely it will be to make good decisions when it comes to resource allocation – it’s a matter of sophistication, financial understanding and an understanding of its environment. This needs to be part of the broader picture and the organisation’s overall financial sustainability.

We are currently looking at NFP financial sustainability and the roles of NFP CFOs, and how they can advise the board effectively so that they can make educated decisions and benchmark initiatives over a period of time. This will allow organisations to identify the success of the programs, the current environment and how they drive strategies to get the best results.

There is no simple answer to the question – it is a big picture issue. It’s a board level decision that gets activated once it has made the decision about where it wants to generate funding from. This is the key to taking a NFP to the next level – taking a small NFP to a medium NFP. A lot of organisations struggle with this – they plateau and never really take their organisation to the next level. This is often due to the quality of the board members. Recently, there has been a greater focus on governance and responsibility at a board level. NFP board members are becoming more aware of their responsibilities – they can no longer sit on a board and remain inactive, they need to be aware of what is required of them, and they need to make informed decisions. For a NFP to grow, it must have a board that is capable of delivering this.

This study was conducted to examine NFP expenditure patterns. To obtain a copy and find out more, visit: www.qut.edu.au/research/research-projects/not-for-profit-accounting-and-accountability-research-group