Big Nonprofit Spending: Where the Dollars Go
If you’ve ever donated to a nonprofit—or perhaps worked for one—you may wonder where all of those donation dollars end up. A key question that donors often want to know is how much of a charity’s funds are spent serving people in need. According to the Charities Review Council, at least 65 percent of funds should be spent on total annual expenses for programs, and no more than 35 percent on fundraising and administration combined—although there could be acceptable reasons for deviation from that standard. CharityWatch considers a charity to be highly efficient when program spending is 75 percent or higher. For a glimpse into these dynamics, Accounting@Syracuse looked at the 2015 Form 990 tax returns for some of the biggest and most well-known nonprofits. We examined their budgets to see where and how they spend their money. Here’s what we found out.
Nonprofit Spending Patterns
For the 10 organizations evaluated, we segmented total spending into three categories: programs, fundraising, and administrative. As you can see, the American Red Cross tops the chart in total spending and the United Nations Foundation has the lowest total spending of the 10 organizations listed. However, the more significant dynamic relates to how dollars are spent within each category—notably the relationship between total spending on programs and the breakdown of fundraising and administrative costs.
“It’s important as a donor to understand what the allocation between these types of expenses means for your contribution, ” says Christie Novak, an accounting professor at Syracuse University’s Whitman School of Management.
For example, if you donate $1,000 to the Wounded Warriors Project, based on their budget breakdown, “you could reasonably expect that $599 (59.93 percent) of your donation would be spent on their mission, $61 (6.05 percent) would be spent paying for administrative expenses, and $340 (34.01 percent) would be used to help raise additional donations,” Novak says.
Beyond this breakdown of spending, nonprofits have a lot of similarities to businesses. They too have to make budgeting decisions to move their mission forward and stay effective and competitive in the modern world. With huge percentages of donations coming from online giving, it is now more important than ever for every organization to be accessible and credible in the digital space. In a time of so much information and an inundation of advertisements, it’s crucial to find innovative ways to advertise that truly make an organization stand out. The ALS Association had great luck with this when some of their supporters created and popularized the Ice Bucket Challenge, which increased donations by almost $100 million in a month.
Nonprofits, like for-profit businesses, have to balance these innovation costs with other expenses that are as important today as they have always been. Finding the right leader for an organization is crucial, but it doesn’t always come cheaply. Perhaps even more importantly, incentivizing talented employees to apply and stay can be costly. Deciding how much to allocate for salaries and benefits is huge. For some organizations, this makes up about half of their budget.
The spending allocation for each of these organizations varies as widely as their priorities. When comparing spending and deciding where to donate, it’s important to research the context behind these dollar amounts as well.
With access to the specifics of nonprofit spending to show where donor dollars go, you’ll be better equipped to decide which organizations align with your giving goals.