Australian charities locked into funding starvation mode

Funders are being called on to fund overhead costs as experts say the “hand to mouth” existence many charities are operating under is not sustainable

Australian charities are being hamstrung by a lack of funding for overhead costs such as rent, HR, and IT services, which is impacting service delivery for vulnerable Australians, new research has found. 

A report by the Centre for Social Impact (CSI) and Social Ventures Australia has found that the prevailing funding model for not for profits is failing to cover indirect operating costs, threatening capability and effectiveness across the sector.

Produced with support from the Paul Ramsay Foundation and Origin Energy Foundation, the report found that indirect costs – such as IT, finance and human resources – comprised an average 33 per cent of the total cost of running a charity. However, funding agreements typically accounted for indirect costs of just 10 to 20 per cent.

With many Australian charities already under financial stress because of the pandemic, the report warned that organisations were at risk of being locked into a “starvation cycle”. This means that funders have inaccurate expectations of how much overhead is needed to run a not-for-profit because organisations are underrepresenting their costs.

Professor Kristy Muir, the chief alliances officer of the Paul Ramsay Foundation, told Pro Bono News that this “hand to mouth” existence was not sustainable for charities. 

“Many not for profits have very thin or often no profit margins… and so what that means is they’re chasing the next contract to help them pay for the overhead costs of other contracts… it’s a vicious cycle,” Muir said. 

Rethinking funding

The report pointed to similar research conducted in the US that sparked a long-running campaign to change perceptions of overhead by philanthropists and the government. 

This campaign has been taken up by a number of influential funders, and contemporary practice in US philanthropy is moving towards a “pay-what-it-takes” approach to philanthropy – ensuring a grant making approach that provides enough money for not for profits to pay for all their operations, not just programs and services. 

While the same conversations around indirect cost funding for Australian NFPs have been gathering pace, the pandemic, and the resulting financial uncertainty it created, was a catalyst for key organisations and funders to examine the issue in a local context.

The latest report calls for philanthropic and government funders to offer full-cost funding to ensure NFP organisations can maximise their impact, something that Muir said was a critical first step. 

“Funders have a really key role in changing that culture and giving NFPs permission to ask for enough funding to cover those indirect costs,” she said. 

She said that one way the Paul Ramsay Foundation was doing this was by setting an interim 30 per cent standard for indirect costs across funding agreements, with flexibility to shift that percentage higher or lower, depending on the specific need of the organisation. 

“We know different not for profits have different levels of indirect costs,” she said. 

“What we’re doing through this report is coming out there to signal to the funding sector… that we are supporting paying for the true indirect costs.” 

The Smith Family’s CEO, Doug Taylor, said he hoped the report would help funders understand the real costs of making an impact and creating sustainable NFP organisations.

“In the quarter of a century I’ve worked in the not-for-profit sector, I have seen first-hand what can happen when funders don’t cover all the costs of these organisations,” Taylor said.

“When charities are forced to cut corners or burden frontline staff with additional admin work or forever chase new sources of funding, this threatens their ability to make a real and lasting impact for the people who need it most.”

Paving the way for a sustainable sector 

Muir said that if a pay-what-it-takes approach was adopted, charities would have the chance to deliver their full impact. 

“All registered charities exist for public benefit, and at the moment we’re not seeing that full benefit being fully achieved because the current funding model is holding a number of charities back,” she said. 

See a full copy of the report here.