The conversation around adequate funding models for NFPs and Charities, not only in Australia but globally, has been under the spotlight recently. A report tabled by Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) Paying What It Takes outlines the sector’s financial concerns, particularly the funding of indirect costs. The report highlights a physiological barrier that creates underinvestment in essential capabilities.
Indirect costs are invisible costs that are difficult to reconcile against a particular project. For example, a charity may host an event to raise awareness or funds. The costs of hosting the event are visible, such as venue hire, catering, etc., and they are easy to see and tangible. However, this is a one-off, and the charity must still operate in its mission. Indirect costs are financial commitments the organisation is required to meet on an ongoing basis, such as:
Administration costs
- Salaries
- Human resources expenses
- Office supplies and needs (not attributed to a project)
- Legal and accounting fees
Facilities and utilities
- Rents
- Electricity, water, gas
- Building maintenance – Repair works
- Security services
IT and Communications
- Software licences
- Cloud services or server costs
- Phone and internet
- IT support
Insurances
- Liability insurance
- Building, contents, and business interruption insurance
- Vehicle and other assets
- Workcover or other state and territory workers’ compensation schemes
- Compliance costs
Training and professional development
- Onboarding
- External training sessions and workshops
- Ongoing education, upskilling and staff accreditation costs
Shared services and finance fees
- Bank fees
- Interest charges
- External financial consultants
- Procurement and logistics
- Marketing expenses
These costs can be a substantial outlay for the organisation. The average indirect cost (overhead) to an NFP or Charity is reported to be 33% of its total expenses.
The psychological viewpoint
Too many NFPs and charities underestimate or underreport the indirect or overhead costs incurred. There is a physiological barrier between funders and the organisations themselves that overhead costs are either too high or are seen as wasteful. There are examples, as highlighted in the Paying What It Takes report that “Indirect costs have an image problem, to put it lightly. Funders (including the general public) sometimes choose not to fund NFPs with ‘high’ indirect costs.”
Within the report, there is an excellent paragraph from Jack Health. “The funding of direct costs without indirect costs leads to the “volcano funding approach”, where program delivery is funded but core costs are not: It leads to organisations where the centre is hollowed out, but it’s built up around the edges. And, you know, volcanoes do two things: they blow up, or they go dormant”.
How should NFPs and Charities approach this issue?
The underlying message from the report is trust in the relationship and a commitment to transparency and honesty about the organisation’s indirect costs. Funders are becoming increasingly aware of the need to adequately fund NFPs and Charities, including indirect costs, and change the negative perception associated with them. Without robust resources attributed to indirect costs, NFPs and charities will struggle to fulfill their mission and provide the services and programs required to meet their objectives.
At Accounting For Good, we firmly believe that organisations and funders must shift their thinking around indirect costs. The regulatory and compliance frameworks require the sector to act within a set of standards, which we are fully invested in; however, organisations must be able to act safely and not fear judgement or losing their funding due to reasonable and accountable overheads.
We recommend that anyone involved directly or indirectly with the NFP or Charity sector read the Paying What It Takes report.
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