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Administrative costs of aid organisations
Donors generally want as much of their money as possible to go directly to the people they are trying to help. At the same time, every organisation needs a certain amount of administration just to be able to function. This is precisely where confusion often arises: how much administration is normal, and at what point does it become a problem? In this article, we explain what aid organisations’ administrative costs are actually used for, what benchmarks exist, and what to look out for when comparing different organisations.
What are administrative costs actually used for?
Without a functioning administration, no organisation could collect donations or implement projects in the long term. Accounting, annual accounts, issuing donation receipts and coordinating project work all need to be funded, as does the recruitment of new supporters. Even those who believe that voluntary work is, by definition, free of charge overlook the fact that even volunteers often require travel expenses, materials or training, which must be accounted for somewhere in the budget. In practice, an organisation with no administrative costs at all would be hardly able to operate reliably, as even the simplest bookkeeping or communication with the tax authorities requires time and resources.
Tasks funded by administrative costs
The traditional tasks that fall under the heading of administrative costs in almost every charitable organisation include, amongst others:
- Accounting, annual accounts and reporting
- Human resources and payroll
- IT infrastructure and data protection
- Issuing donation receipts and communicating with donors
- Fundraising, i.e. securing new financial support
Without these foundations, an organisation would be unable to account for how the money was spent, nor would it be able to raise sufficient donations in the long term to fund its projects.
How high can administrative costs be?
There is no fixed statutory upper limit for administrative costs in Germany. Instead, rough guidelines have become established over the years, which both organisations and donors can use as a reference.
Guidelines and classification
According to common assessments, advertising and administrative costs of between approximately 5 and 20 per cent of total expenditure are often considered reasonable, whilst figures between 20 per cent and around 30 to 35 per cent are often still regarded as acceptable. According to estimates, the average for audited organisations is around 14 per cent. The DZI charity seal also uses a similar threshold and assesses organisations whose advertising and administrative expenditure is significantly higher than this more critically and rigorously.
It is important to note that a low percentage on its own says nothing about the quality of an organisation’s work. International aid organisations operating in remote regions naturally require more structure – and therefore more administration – than a small, entirely volunteer-run local charity. So anyone asking what percentage of funds actually reaches beneficiaries through an aid organisation will rarely receive a simple, blanket answer; instead, they must take the organisation’s specific circumstances into account. Anyone wondering what percentage goes towards projects should therefore always take into account the nature of the work and the size of the organisation, rather than relying solely on a single figure.
How can you tell how much actually goes to the projects?
It is often difficult for outsiders to directly compare the administrative cost ratios of different organisations, as not every organisation calculates and reports its costs in the same way. For example, some organisations allocate all staff costs for fundraising entirely to administration, whilst others allocate them proportionally between project work and administration, depending on how the staff in question actually spend their time. This difference in approach explains why percentages that appear comparable at first glance sometimes cannot be compared on a like-for-like basis. So, if you’re wondering how much of your donation actually reaches its intended cause, you’ll usually find the most reliable answers in the organisation’s annual report, rather than in promotional materials.
What to look out for when comparing figures
A few simple and practical pointers can help you make better sense of the figures provided by different organisations in day-to-day life, even without having to delve deeply into financial statements:
- Check the annual report and financial figures on the organisation’s website
- Consider the administrative cost ratio in relation to the nature of the project work
- If the figures are extremely low – at just one or two per cent – ask probing questions, as an organisation cannot operate professionally without any administrative support
- Look out for independent quality marks such as the DZI charity seal, where available
When comparing charitable organisations, one should therefore not focus solely on the lowest administrative cost ratio, but also on how transparently an organisation discloses its figures and how well the results of its work are documented. An organisation that speaks openly about its costs and explains clearly exactly what the money is used for generally commands more trust than one that merely advertises a particularly low percentage without explaining it in more detail.
Ultimately, the administrative cost ratio remains a useful indicator, but it is just one factor amongst many when assessing the work of an aid organisation. If you really want to be sure that your donation is being put to good use, it is best to combine several sources of information: the annual report, independent quality seals and a critical look at the actual project results on the ground. This provides a much more complete picture than a single percentage figure could ever offer, and ultimately allows you to choose a particular organisation on a sound, transparent basis.