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The question of charity overheads

Donating is key part of faith and worship during the month of Ramadan. Each donation during this period represents, a prayer, an emotion, memory of a deceased loved one or simple sacrifice of personal funds – this is why, when some charities are not able to give a satisfactory answer – it hurts.

Muslim Charities in the last 20 years have become large with millions at their disposals. Stories of high salaries and high spend on marketing with few bad stories of mismanagement of funds or safeguarding issues damages the reputation of the whole sector. The question of overhead and value for more becomes more pressing.


During the Covid crisis in 2020, I analysed the accounts of 20 large Muslim charities to assess their financial health. This provided a glimpse of the charity sector finances of the 20 Muslim charities.


In summary

  • they raised around £225m of which around £80m raised in Ramadan

  • Payroll – £40m with 1300 employed with many self-employed

  • Charities had £107m in cash at year-end

When considering the question of overheads, donors should look out for the following in the charity accounts:


1. How much is being spent to raise funds and is this disclosed properly?


Although this makes donations increase in size and helps charities contribute more to their causes, a high spend with little returns may suggest waste of funds.


My analysis of the 20 large charity showed on average the cost of fundraising was around 17% of the total funds raised – each £1 spent was raising £6.


My analysis noted some did not disclose fundraising costs at all, despite these charities raising millions each year. It costs to reach donors, especially when you have employed fundraisers, adverts on TV and social media, poster, and leaflet campaigns and call centres – this all adds up.


When a charity does not disclose its costs of fundraising costs, these costs are then showing as part of charitable costs – money spent on actual causes. This maybe driven by the desire to show 100% donations (or close to it).


Online fundraising, TV adverts, fundraising consultants and call centres, all focused on raising money from the public demand’s significant resources. A charity that uses such methods to fund raise can expect to raise £4 for every £1 spent. As a result fundraising costs can be around of 25%, if not more. This is supported by my analysis of the 20 charities – four charities had cost of fundraising around that level.


However many charities do better and these costs can be from around 15% depending on the fund raising model employed by the charity, its established brand and following.


2. How is charitable spend incurred?


If this is incurred through third party organisations abroad, then the real overhead incurred abroad is not disclosed in the charity accounts – this sits with the third-party organisation. The charities are required to disclose these third party partners and how much grants are paid to them.


A good and effective overseas operation that is planned and delivered properly will have indirect overheads of 5% to 10% of the total spend in the country. Some countries are more costly than others for delivering relief projects. Overheads lower than 5% may indicate cutting of corners or some exceptional circumstances.


3. How much is being spent on support costs and what is included?


The Charity Commission requires all charities to disclose their support costs in their annual accounts. These are indirect costs that are incurred when delivering projects.


For an International relief charity, this should represent the general back-office costs (i.e. finance, HR, facilities and IT costs) that support fundraising and charitable activities. For an International relief charity this can range between 5% and 12% of total income.


The larger the charity, the smaller the percentage due to economies of scale. This does not mean a large charity becomes better at managing support costs – they should be measured against a similar size charity.


4. What is the salary ratio to income?


All charities are required to disclose their payroll costs in their accounts. During my analysis of the 20 Muslim charities, I noticed the overall ratio of payroll cost to total income to be around 11% of the total income. All charities are required to disclose staff on salaries (including benefits) higher than £60,000.


A lower ratio may indicate many workers on consultancy contracts and costs hidden within fundraising and charitable costs.


If a charity runs its own field offices, then the salary of such office staff should also be disclosed in this note. However, if the charity model is such that the projects are delivered through a third-party Partner which is often the case, then the salary costs of the field office are hidden within the Partners accounts only.


My Analysis showed that Muslim charities generally need to improve the information they disclose in their annual accounts – these should not be just marketing documents but a mechanism to satisfy the donors with many genuine questions and concerns.


Muslim charities appeal using faith values and the very same values require transparency, better accountability and that the donations are spent wisely and effectively.


Nasir Rafiq is the founder and director of Dua Governance Chartered Accountants and Business Advisors – He is a widely experienced Fellow Chartered Accountant and a charity finance specialist.

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