{"id":340,"date":"2014-02-25T21:09:13","date_gmt":"2014-02-25T21:09:13","guid":{"rendered":"http:\/\/givinglife.canadahelps.org\/?p=340"},"modified":"2024-10-31T16:57:44","modified_gmt":"2024-10-31T20:57:44","slug":"canadas-charities-deserve-better","status":"publish","type":"post","link":"https:\/\/www.canadahelps.org\/en\/giving-life\/giving-strategy\/canadas-charities-deserve-better\/","title":{"rendered":"Canada\u2019s charities deserve better"},"content":{"rendered":"

\"Impact<\/a><\/p>\n

It\u2019s time to have a frank discussion about charities and their administrative and fundraising costs.\u00a0 Over the past decade, the increasing focus on a charity\u2019s cost of doing business has forced the entire charitable sector to defend itself against a rash of na\u00efve accusations.<\/p>\n

While there is no doubt that a few bad apples have found their way into the sector, the fact remains that over 85,000 other charities are doing precisely the work that most of us admire: feeding the needy, housing the homeless, nursing the sick and educating the young. Why some choose to focus their energy on the rotten apples rather than the orchard of vibrant ones is, sadly, a product of our negative media culture.<\/p>\n

Our charitable sector is perhaps our great country\u2019s most valuable resource. It places human decency and kindness above all else. It is not surprising then that the charitable sector has reacted to the recent focus on its cost structure with politeness, diplomacy and tact. The sector has (correctly) pointed out that evaluating a charity\u2019s fundraising cost ratio might very well reflect its fundraising efficiency, but may have little correlation to a charity\u2019s ability to achieve its mission (that is, its impact on societal betterment). The problem is that measuring a charity\u2019s impact is difficult and subjective, while measuring fundraising efficiency is relatively simple. In the final analysis, however, impact is really the only thing that truly matters.<\/p>\n

I work for an investment management company (although admittedly, I\u2019m no investment expert). When portfolio managers analyze companies, they look at a variety of factors before they decide to invest. First, they crunch the numbers from absolutely every angle. Second, they look at other less tangible factors \u2013 the company\u2019s management team, its products and services, etc. Third, they look at the company\u2019s secular context \u2013 its competitors, the industry in which it operates and even broader local and global economic inputs. In other words, their analysis is not just a simple numerical one but one that incorporates broader judgment.<\/p>\n

For the sake of argument, let\u2019s say our investment analysts are evaluating three companies:<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nCoal Mining Company<\/strong><\/td>\nFurniture Manufacturer<\/strong><\/td>\nSoftware Developer<\/strong><\/td>\n<\/tr>\n
Revenue*<\/td>\n$10,000,000<\/td>\n$5,000,000<\/td>\n$1,000,000<\/td>\n<\/tr>\n
Production Costs<\/td>\n$2,500,000<\/td>\n$1,500,000<\/td>\n$300,000<\/td>\n<\/tr>\n
Marketing Costs<\/td>\n$100,000<\/td>\n$200,000<\/td>\n$100,000<\/td>\n<\/tr>\n
Administration Costs<\/td>\n$400,000<\/td>\n$300,000<\/td>\n$100,000<\/td>\n<\/tr>\n
Total Costs<\/td>\n$3,000,000<\/td>\n$2,000,000<\/td>\n$500,000<\/td>\n<\/tr>\n
Net Profit<\/td>\n$7,000,000<\/td>\n$3,000,000<\/td>\n$500,000<\/td>\n<\/tr>\n
Cost Efficiency (Profit as a Percentage of Overall Revenue)<\/td>\n70%<\/td>\n60%<\/td>\n50%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

*Note: It is recognized that these terms are not necessarily the ones used to describe the item in a company\u2019s financial statement<\/em><\/p>\n

I presented this scenario to a few of our highly sophisticated portfolio managers and asked them which company they would select as an investment. Not surprisingly, they had about 75 additional questions, some focusing on numbers, others focusing on more qualitative factors. At the end of the exercise, they told me they would invest in the company with the greatest promise.\u00a0\u00a0 While the numbers are part of the analysis, they are understood in a broader context.<\/span><\/p>\n

Let\u2019s take a similar analysis and extend it to charities.<\/span><\/p>\n\n\n\n\n\n\n\n\n\n
<\/td>\nWomen\u2019s Shelter<\/strong><\/td>\nInternational Development Agency<\/strong><\/td>\nCommunity College<\/strong><\/td>\n<\/tr>\n
Revenue<\/td>\n$1,000,000<\/td>\n$5,000,000<\/td>\n$50,000,000<\/td>\n<\/tr>\n
Fundraising Costs<\/td>\n$50,000<\/td>\n$500,000<\/td>\n$2,500,000<\/td>\n<\/tr>\n
Administration Costs<\/td>\n$100,000<\/td>\n$750,000<\/td>\n$15,000,000<\/td>\n<\/tr>\n
Total Costs<\/td>\n$150,000<\/td>\n$1,250,000<\/td>\n$17,500,000<\/td>\n<\/tr>\n
\u201cProfit\u201d \u2013 (Funds left to deliver programs and services)<\/td>\n$850,000<\/td>\n$3,750,000<\/td>\n$32,500,000<\/td>\n<\/tr>\n
Cost Efficiency (Profit as a Percentage of Overall Revenue)<\/td>\n85%<\/td>\n75%<\/td>\n65%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

I asked the same portfolio managers which charity would be more likely to attract their donation. They unanimously responded with a blank and befuddled stare. One asked me why he would donate to a community college when he never attended one. Another said he\u2019d prefer to direct his donations within Canada rather than outside of the country. A third told me that she had volunteered at a shelter and would definitely choose it over the other two. There was no analysis \u2013 no focus on profit or efficiency. Their decision was\u00a0 a thoughtful one but it was based on personal values around philanthropy and volunteerism rather than on quantitative factors. The choice was a seemingly simple one \u2013 so I decided to make it more difficult.<\/p>\n\n\n\n\n\n\n\n\n\n
<\/td>\nWomen\u2019s Shelter A<\/strong><\/td>\nWomen\u2019s Shelter B<\/strong><\/td>\nWomen\u2019s Shelter C<\/strong><\/td>\n<\/tr>\n
Revenue<\/td>\n$1,000,000<\/td>\n$1,000,000<\/td>\n$1,000,000<\/td>\n<\/tr>\n
Fundraising Costs<\/td>\n$50,000<\/td>\n$100,000<\/td>\n$200,000<\/td>\n<\/tr>\n
Administration Costs<\/td>\n$100,000<\/td>\n$150,000<\/td>\n$100,000<\/td>\n<\/tr>\n
Total Costs<\/td>\n$150,000<\/td>\n$250,000<\/td>\n$300,000<\/td>\n<\/tr>\n
\u201cProfit\u201d \u2013 (Funds left to deliver programs and services)<\/td>\n$850,000<\/td>\n$750,000<\/td>\n$700,000<\/td>\n<\/tr>\n
Cost Efficiency (Profit as a Percentage of Overall Revenue)<\/td>\n85%<\/td>\n75%<\/td>\n70%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

As donors and media consumers, we\u2019ve been led to believe that Shelter A is \u201cbetter\u201d than Shelter B, which in turn is better than Shelter C. But our sophisticated portfolio managers are quite astute even on matters relating to philanthropy. More questions arose when I asked them which charity would be their preference.<\/p>\n