Judith Evans | Financial Times | 14 Aug 2015
Donors have been warned to “think like investors” and scrutinise charities’ finances before handing over their money, following the closure of Kids Company amid claims of financial mismanagement.
The young people’s charity attracted donations that in some cases topped £1m, but closed its doors this month despite a rescue package from the government. It emerged that ministers and civil servants had raised concerns about its governance over a period of years.
“When you decide to give to a charitable cause, you want your money to work as hard as possible,” said Dan Corry, chief executive of New Philanthropy Capital, a consultancy.
“A lot of people, when they give, don’t think the way they would when making an investment . . . they don’t think in the same hardheaded way they would elsewhere.
“Not only does that mean that money doesn’t get allocated to do the maximum social good, it also means charities that aren’t very good can keep going, because people keep giving them money.”
UK individuals give at least £10bn a year to charities. Some philanthropists carry out sophisticated due diligence, but many choose between the country’s almost 200,000 charities on the basis of personal connections, well-known brands or “anecdotes and moving stories”, said Mr Corry.
However, a relatively brief engagement with a non-profitable organisation can yield either warning signs or indications that it is wellrun, say experts.
Effectiveness is a key concern. Large organisations may have internal monitoring departments, but even smaller charities must be able to explain the impact of what they do and how they tell if it works, said Caroline Duckworth, chief executive of Quartet Community Foundation, which matches donors with smaller charities in the west of England.
Organisations should be able to present a “theory of change” which explains the difference they want to make and how they improve their work from year to year, said Mr Corrie.
Ms Duckworth suggests visiting in person — a step which raised concerns for some Kids Company donors. Larger donors should also ask for regular monitoring reports on how their money is being used; Quartet receives these even where donations are as small as £2,000.
To check a charity’s financial health, start with its accounts on the Charity Commission website. Accounting rules for charities are less stringent than for companies, and non-profits often file accounts late, but many good charities volunteer extra information, says Ms Duckworth.
As Kids Company has shown, low cash reserves can be a warning sign, whereas high reserves may lead donors to question why the charity needs their money.
“Good practice is to hold between three and six months’ worth of reserves,” says Ms Duckworth. Outside these limits, a charity should have a good explanation for its situation.
Charities should be able to demonstrate they are not overly dependent on one source of income, said Mr Corry.
High staff costs should prompt further questions. “You might want to look at levels of senior management remuneration, but some of these multimillion pound charities are big, complex beasts to run, and you need to pay talented people to run them. It’s about taking a sensible overview as you would with a private sector business,” said Ms Duckworth.
Rapid staff turnover is another red flag, as are high ratios of staff to beneficiaries, but in some cases — such as dealing with young people with complex needs — high staffing levels are “reasonable,” she said.
As with investments, donors should assess their risk appetite, said Mr Corry. A more innovative charity might suit donors prepared to accept the possibility of failure.
Gina Miller, founder of Miller Philanthropy, said charity accounting should be reformed so organisations provide more detailed information; she also called on trustees to take a hands-on oversight role.
But potential donors also have a responsibility to scrutinise charities, and they should consider offering services as well as cash, she said.
“Funders really need to think about moving away from their cheque books and using their expertise to help charities build. One thing that’s missing in many charities is financial and business acumen,” said Ms Miller.
Governance: who is on the board and how long have they served for? Do they have relevant skills?
Leaders: does the charity have a good chief executive who balances their own shortcomings with a strong team?
Turnover: high staff turnover should lead donors to question why
Finance: over-reliance on one or two donors is bad news; existing funding from reputable donors is good news
Reserves: at least three to six months’ worth of reserves, or even 12 in some cases, shows the charity can withstand emergencies
Administration: donors sometimes seek for these to be as low as possible, but that can be counterproductive. Admin costs of 15 percent are “absolutely reasonable”, said Jo Ensor, director at The Philanthropy Workshop; they can even be higher for charities that focus on advocacy
Theory of change: what is the charity trying to achieve, is it sustainable, how many people will it affect, how is impact measured?
Source: The Philanthropy Workshop