Overheads exist, so when approaching grantmakers for core funding, it’s vital that charities are able to measure, and convey to the funder, the real cost of the work they do.

Last year, a report by six voluntary sector bodies showed that between 2007/09 and 2013/2014 grants from central and local government fell by 49.3%.That’s around £2bn in lost income – a pretty stark figure for charities who are relying on government grants to be able to deliver services. Small charities have been particularly hard hit, losing over a third of their government income. Many won’t have the individual giving fundraising operations to compensate.

Enter the trust fundraiser. Trust fundraising is low cost and offers a high return on investment, making it a natural choice for charities who need to diversify their income. As government grantmaking has fallen, grantmaking by charitable trusts and foundations has increased, reaching a high of £2.5bn in 2013/2014 (though this still falls short of pre-recession giving).

While this increase is grant funding is good news for charities, “trust fundraising” and “core costs” aren’t necessarily concepts which sit easily alongside each other (and “overheads” is practically an expletive). Nevertheless, it is a truth that meeting the world’s grand challenges requires people – and not just people, but the mundane things that make organisations work like computers, chairs, electricity, HR personnel or accountants’ fees.

Changing the conversation about overheads

Core costs, overheads, indirect costs... call them what you like: we can’t run our organisations without them. These do not an exciting proposal make. However, if we need external funders to help us deliver the vital, life-changing work our charities do, it’s up to us to explain the real cost of the work we do. So we need to change the conversation.

This is an issue USA-based non-profit consultancy group Bridgespan have been talking about since 2009 when they published The Nonprofit Starvation Cycle , which highlights the crippling impact of pretending overheads don’t exist.

Similar concerns have been expressed this side of the pond. Speaking at the Weston Charity Awards this month, Philippa Charles, director of the Garfield Weston Foundation said: “Supporting the running costs of a charity is crucial if we are to avoid charities experiencing a slow decline. Charities tell us they are too afraid to ask for this sort of funding for fear of being turned down. Having supported thousands of charities over the last 60 years, we know how important it is that charities feel able to apply for this sort of funding so that they can continue to deliver great services.”

The move towards ‘pay what it takes’ philanthropy

Bridgespan have joined a group of major funders and not-for-profit organisations in calling for a “pay what it takes” approach to philanthropy. This means focusing on the impact you need to have, calculating the real cost of achieving it and partnering with grantmakers to do what it really takes. Simple, right? If only.

Let’s say you can already articulate a compelling need (or opportunity) to change the world around you for the better, you can already explain why your charity is best placed to meet that need (or realise that opportunity), and say why you need to do it now. You can already explain how there is a role in that for your chosen grantmaker, and why it is you need them to make this happen.

I’m not suggesting that this is an easy process: it takes a vast amount of information gathering: conducting interviews, sourcing data, case studies and quotes. It takes time and skill to slice through all that information to get to the beating heart of what it’s all about – the who, the what, the why, the when and the how. It takes collaboration to put together a delivery plan and work out how you will monitor progress and outcomes.

And that’s before you get to costs, and (in these straitened times) not just any cost but pay what it takes philanthropy costs – costs that include the overheads/indirect costs needed to ensure that your charity is properly staffed and resourced to make a real difference to its beneficiaries. The difference your funder wants you to make.

Barriers to working out your programmes’ true costs

I’m sure I’m not the only fundraiser who has found getting solid and accurate costs, including solid and accurate indirect costs, a challenge over the years.

There can be numerous attitudinal and operational barriers to doing that. All too often, programme delivery is shaped by a budget imposed at the start of the financial year, by people who aren’t engaged with programme delivery. Often this is a budget based on what was spent in the previous year, plus or minus 1% or 2%. There’s nothing strategic about this. This is not a budget shaped by the need, or the activities required to meet the need.

In this scenario it’s easy enough to identify direct costs – the specific cash you need for your charity deliver a particular project. It’s not so easy to identify indirect costs (computers, HR etc) – these are all incorporated into that year-to-year operational budget. Which is fine, until you need to get them externally funded by a grantmaker, and need to calculate how a proportion of these indirect costs make a project happen.

The questions that don’t get asked

Often there is just a lack of understanding about how much things actually cost. No one has sat down and said: “Here are our strategic priorities. What operational infrastructure do we need in place to deliver that? What does each element of this cost? What proportion of these operational resources will be required for our service delivery [or specific project]?” Or in other words, a full cost analysis of what it takes to deliver on your mission.

It’s not easy for a trust fundraiser to reshape an organisation’s financial planning, but if the funding trends in our sector continue on their current trajectory it’s a discussion we need to start having.

However, even without a wholesale budget planning revolution, we can make some strides towards costing our projects in a pay-what-it-takes philanthropy kind of way. Establishing a model for that will involve many different stakeholders across in your organisation – but it gets easier each time it is done.

So what do you need to know about calculating costs?

Let’s assume you know what programmes or projects you need to deliver (e.g. running costs for three day centres, an advice service, a fostering service and a policy team), and that you have prioritised where you need external funding.

Once you know your area of focus you need to calculate your direct costs, e.g:

·     salaries (including on costs like national insurance and employer contributions) for staff working on the programme

·     travel expenses and equipment used by these staff

·     supplies or materials specific to this programme

·     room hire (if used)

·     contractor or supplier fees

Then you need to calculate your indirect costs. Bridgespan helpfully suggests this might include a proportion of:

·    administration and management expenses not directly associated with the programme, such as the salaries and on costs for the receptionist or the chief executive

·    infrastructure e.g. rent, utilities, transport, equipment depreciation, licenses

·    other costs which benefit all programmes within the organisation (e.g. marketing and fundraising costs).

Indirect costs are trickier than direct costs because they are variable. You can’t meaningfully apply a flat rate. For example, your three day centres might represent 80% of your charity’s transport costs, whereas your fostering service might use 45% of your charity’s marketing resources. An HR manager will spend more time on a department with 60 people than one with two, so the percentage of his or her salary and on costs needs to be calculated accordingly.

What it really takes to change the world

Your direct and your indirect costs equate to the true cost of delivering a project, but by taking the time to cost it out fully you can ensure your trust fundraising programme is helping to support your charity’s core costs, ensuring its sustainability long into the future.

The added bonus is being able to demonstrate how every aspect of your organisation is pulling together towards your common goal.

Plus, having this robust information to hand will give you the detail you need to be able to talk to your funders about what it really takes to achieve the change you all want to see in the world.

Charities aren’t founded with the aim of achieving low overheads. They are founded to meet a need or realise a vision for a better world. Let’s raise what we need to make that happen.

Let’s change the conversation.

Margaret Clift McNulty (@collectivemarg) is head of development at National Museums Scotland. She blogs regularly at: www.fundraisingcollective.com