Charities play a vital role in addressing negative issues, supporting vulnerable people in our society, and bringing about positive change. However, funding remains a significant challenge—perhaps more so now than it ever has been. Whilst it’s crucial to secure funding for specific projects and programmes, it’s equally important that funders recognise and support the operational and core costs of the charities to which they award grants.
The cost-of-living crisis has affected everyone, from private business to individuals and families, to charities that already struggled to stay afloat.
Everything costs more currently. Utilities, insurances, rent. How are charities meant to meet these increases when their income will have undoubtedly taken a nosedive in the last year or so? And if they can’t continue, where does that leave the people they were helping?
Understanding operational and core costs
Operational and core costs encompass the essential expenses that charities incur to function effectively and sustainably. These costs include rent and utility bills for office spaces, insurance premiums, salaries for core staff members, professional development and training, technology infrastructure, and other administrative outgoings. These costs are often overlooked or underestimated, as funders are often more inclined to only support direct programme activities.
Charities are like any other business, with the same outgoings. However, they differ in that they don’t sell a product or service and instead rely on donations, grants and handouts to function.
Hidden costs and financial liabilities
Despite limited resources, charities are still required to meet several financial obligations. One such expense is insurance. Charities need various types of insurance coverage, including public liability, employer's liability, and professional indemnity insurance. These policies protect both the charity and its beneficiaries, but they can be costly and can place a strain on their already limited budgets.
Charities also have a responsibility to ensure the safety and well-being of their volunteers. As part of this, they must conduct Disclosure and Barring Service (DBS) checks to assess the suitability of volunteers tasked with working with children and vulnerable adults. The cost of these checks can quickly add up, especially if the charity relies heavily on volunteers.
Rent and utility costs are often significant expenses for charities. Providing a safe and accessible space is crucial for organisations to deliver their services effectively. Unfortunately, the high rental and utility prices in many areas can severely impact an organisation's ability to allocate funds towards their core activities. Adequate funding for operational costs ensures that charities can effectively stay afloat and continue to support their communities.
In the past, charities have commonly requested a management fee of 10% in their funding bids and applications. This fee is meant to cover the administrative and management costs necessary for efficient operation of the funded project only. Given the rising cost of essential outgoings, however, I recommend incorporating a 15% management fee in future applications.
There are (unfortunately) a lot of funders who don’t consider a management fee integral to an application for funding (some do specify that core costs will be considered). They also restrict funding to project costs only, without acknowledging that core costs, staff wages and essential outgoings need to be covered FIRST, before any project delivery can take place.
If you’re one of these funders, this is why the allocation of a management fee is so important to charities.
N.B. I’d like to see 15% unrestricted funding automatically added to the amount requested by a charity if the funder decides they’d like to see their project go ahead, but I won’t hold my breath.
The argument for a 15% management fee
A management fee allows charities to invest in capable staff and build a strong administrative infrastructure. Competent management ensures that funds are effectively allocated, programmes are monitored and evaluated, and compliance requirements are met. Without a sufficient management fee, charities may struggle to attract and retain skilled professionals, hindering their ability to deliver the sustainable outcomes their application suggests are possible.
Rainy day and out-of-the-blue expenses
A management fee provides a buffer for unexpected expenses and financial challenges. Charities often face unforeseen circumstances, such as emergency repairs, legal fees, or increased demand for their services. Having a dedicated allocation for these situations ensures that charities can respond effectively without compromising their core activities.
Charities typically carry reserves to meet these unexpected costs; however, if they carry too much in the way of reserves (typically, between 4 – 6 months of operational costs) this can go against them when seeking funding. Once a charity starts to use their reserves (which will be a last resort, I promise you), they find that they don’t last very long. It can take a while to get new funders on board or to form viable corporate relationships to replace these reserves, and 4 – 6 months goes very quickly in such a scenario. I think charities should be allowed to stockpile 6 – 12 months of reserves if they’re able to do so; surely this shows a more robust, well-run outfit? They certainly shouldn‘t be penalised for being financially astute and future-proofing when applying for project funding.
No one can foresee what’s around the corner. Lots of charities went to the wall during the Covid pandemic, because bills still needed to be paid when everything else stopped. Healthy reserves could have perhaps saved more of them from folding.
Constantly chasing money to stay afloat is a huge distraction
A management fee represents the true cost of running a charity. By covering operational and administrative expenses, it enables charities to focus on their mission and deliver high-quality programmes and services. It shifts the emphasis from an unsustainable race for project-specific funding to a more holistic approach that considers the long-term viability and impact of the organisation. I’m sure most funders wish to help charities become as sustainable as they can—because what’s the point in getting a project up and running to only see it end after a few months, when it begins to have an impact?
Throwing pennies towards a charity versus ensuring a project can be delivered well and it has the potential to lead to longer-term support and transformational change will always be a waste of funders’ resources in the long run.
I realise that funders have their own outgoings and commitments to meet before they even begin to apportion their pot of money towards projects they wish to support. However, the charitable organisations they wish to fund have exactly the same issue. Money isn’t infinite, I get that, but surely it’s better for funders to properly fund a project (i.e. every aspect of it) than bunging a little bit to a greater number of applicants that will inevitably pose more problems than it’s meant to alleviate?