Paying what it takes keeps NFPs and Charities sustainable

The conversation around adequate funding models for NFPs and Charities, not only in Australia but globally, has been under the spotlight recently. A report tabled by Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) Paying What It Takes outlines the sector’s financial concerns, particularly the funding of indirect costs. The report highlights barriers that create underinvestment in essential capabilities.

Indirect costs are invisible costs that are difficult to reconcile against a particular project. For example, a charity may host an event to raise awareness or funds. The costs of hosting the event are visible, such as venue hire, catering, etc., and they are easy to see and tangible. However, this is a one-off, and the charity must still operate in its mission. Indirect costs are financial commitments the organisation is required to meet on an ongoing basis, regardless of the number of projects and activities it is funded for, such as:

Administration costs

• Salaries
• Human resources expenses
• Office supplies and needs (not attributed to a project)
• Legal and accounting fees

Facilities and utilities

• Rents
• Electricity, water, gas
• Building maintenance – Repair works
• Security services

IT and Communications

• Software licences
• Cloud services or server costs
• Phone and internet
• IT support

Insurances

• Liability insurance
• Building, contents, and business interruption insurance
• Vehicle and other assets
• Workcover or other state and territory workers’ compensation schemes
• Compliance costs

Training and professional development

• Onboarding
• External training sessions and workshops
• Ongoing education, upskilling, and staff accreditation costs

Shared services and finance fees

• Bank fees
• Interest charges
• External financial consultants and auditors
• Procurement and logistics
• Marketing expenses

These costs can be a substantial outlay for the organisation. The average indirect cost (overhead) to an NFP or Charity is reported to be 33% of its total expenses.

Too many NFPs and charities underestimate or underreport the indirect or overhead costs incurred. There is a psychological barrier between funders and the organisations themselves that overhead costs are either too high or are seen as wasteful. There are examples, as highlighted in the Paying What It Takes report, that “Indirect costs have an image problem, to put it lightly. Funders (including the general public) sometimes choose not to fund NFPs with ‘high’ indirect costs.”

Within the report, there is an excellent paragraph from Jack Heath. “The funding of direct costs without indirect costs leads to the ‘volcano funding approach’, where program delivery is funded but core costs are not: It leads to organisations where the centre is hollowed out, but it’s built up around the edges. And, you know, volcanoes do two things: they blow up, or they go dormant”.

The underlying message from the report is trust in the relationship and a commitment to transparency and honesty about the organisation’s indirect costs. Funders are becoming increasingly aware of the need to adequately fund NFPs and Charities, including indirect costs, and change the negative perception associated with them. Without robust resources attributed to indirect costs, NFPs and charities will struggle to fulfill their mission and provide the services and programs required to meet their objectives.

At Accounting For Good, we firmly believe that organisations and funders must shift their thinking around indirect costs. The regulatory and compliance frameworks require the sector to act within a set of standards, which we are fully invested in; however, organisations must be able to act safely and not fear judgement or losing their funding due to reasonable and accountable overheads. A healthy NFP is a sustainable one.  Sustainability cannot be achieved when core (indirect) costs are not provided.

For example, audit costs are a valuable tool that provides an independent assessment of integrity, financial accuracy, and compliance; however, when they cannot be attributed to funded programs, they are typically indirect costs, which may compromise the program’s sustainability and impact.

We recommend that anyone involved directly or indirectly with the NFP or Charity sector read the Paying What It Takes report.

At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.

Contact us for a free consultation if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most—serving your community and driving positive change.