Charitable spending - How charities work (2024)

Should you be worried if a charity has a low proportion of ‘charitable spending’?

You sometimes see a figure for a charity’s proportion of ‘charitable spending’ or ‘charitable activities’.

This is the proportion of a charity’s total income that goes on things that are directly helping it to fulfil its purpose.

So does it matter if this is 80% or 30% – is one better than the other?

The short answer is no.Alower charitable spending percentage doesn’t mean the charity is being run badly.

Below we’ll show how different charities that do the same amount of work can have very different charitable spendingratios depending on how they raised their money, and also how raising more money for their cause can result in a charity’s charitable spending ratiobeing lower.

What is the charitable spending figure?

Charitable spending is the proportion of a charity’s total spendingthat it spendson its end cause, as opposed to other things it might need or choose to spend money on.

People sometimes confuse this with the proportion of donations thatare spent on the end cause – they’re not the same thing, because many charities, especially larger ones, also have other sources of money than donations.

What else do charities spend money on?

Other things that charities often need to spend money on include:

• Governance costs, such as accounting or auditing. These are essential to ensure that the charity is being run effectively.
• Fundraising. Nearly all charities have to invest some money in order to raise more.
• Trading. Some charities raise money by selling goods or services, and there are costs associated with this that the charity has to spend money on.This doesn’t mean that donations aren’t being spent efficiently – the trading makes moneywhich covers its costs and alsogenerates a profitwhich isadded together with public donations and helps them go further.

These things don’t count as charitable spending.

The charitable spending proportion looks different depending on howa charity raises its money

If a charity gets a lot of its income through commercial activities, either traditional forms like charity shops or newer forms such as selling services, then it will have costs associated with this. But these costs are covered by income from the trading itself, not by donations.

The larger proportion of its income a charity raises from trading rather than donations, the lower the proportion of charitable spending is likely to be, because the charity has to spend some of its money on the costs of trading in order to make money.

For example:

• Charity A raises its money from public donations. It spends £20,000 on fundraising and raises £100,000 to spend on its cause. In total it spends£120,000: £20,000 on fundraising, and £100,000 on charitable activities.Its charitable spending ratio is83%, £100,000 as a proportion of £120,000.
• Charity Braises its money bytrading. It spends £200,000 on trading, for example, buying stock or services and or on rent forshops, andmakes £300,000 back. It hasa profitof £100,000 which it spends on its charitable activities. Its charitable spending is33%, £100,000 as a proportion of the total £300,000 spending.

Because of the different ways they raised the money, the charitable spending percentagefor Charity A is 83% and for Charity B it is 33%. But they have both spent £100,000 on their cause.(In reality, they would also need to spend some money on governance.)

Most larger charities raisemoney in a range of different ways, combining public donations, trading and other sources. Having a range of different income sources helpscharitiesremain stable if there are problems with one source of income. Depending on whether they get a larger proportion from donations or from trading, their charitable spending proportion will bedifferent.

Spending more can help a charity raise more

Sometimes a charity has to spend more in order to raise more. This could be on trading or on fundraising. Because it’s spending more on things that aren’t charitable spending, its charitable spending as a proportion of all spending is lower, but itis actually raising more money to spend on its cause.

To see how this works, look at the table below. It shows a charity whichhas an income of £1,000 from public donations. It spent£100 on fundraising to raiseit, soit has £900 to spend oncharitable activities. The charitable spending ratio is 90% (£900 spent on charitable activity as a proportion of £1,000 total spending).

The next year the charitydecides to spend £300 runninga fundraising event that generates £500 of income, a profit of £200. Its total income is now £1,500 (£1,000 donations + £500 from the event) and itspent £400 in raising it (£100 fundraising + £300 on the event). It has£1,100 to spend on charitable activities (£1,500 minus £100 fundraising costs and £300 event costs). The charitable spending ratio is 73% (£1,100 as a proportion of £1,500).

Because the event was successful and raised money, they next year it decidesto do two of these events.Its costs are£700 (£100 fundraising and 2 x £300 for the events) and its income is£2,000. Ithas£1,300 to spend on charitable activities. The ratio of this to total income is 65%.

The charitable expenditure ratio is lower in the third year than the first (65% vs 90%) but the important thing is that by investing more, the charity has raised more money and can help more people.