A charitable organization should spend a significant amount of its annual budget on programs that pursue its mission while ensuring that the organization has sufficient administrative and fundraising capacity to deliver those programs responsibly and effectively.
Charitable organizations have an obligation to devote their resources to the charitable purposes for which they were granted tax exemption, including ensuring that they have appropriate management and support services in place to oversee and deliver their programs and services effectively, while also adhering to relevant legal and ethical requirements.
Administrative activities include financial and investment management, personnel services, record-keeping, risk management, soliciting and managing contracts, legal services, and supporting the governing body of the organization. Not only do these elements ensure that the organization complies with all legal requirements, but they also help provide complete, accurate, and timely information to donors, the public, and government regulators.
Charitable organizations rely on other supporting services to carry out their missions. Most public charities have fundraising operations to encourage potential donors to contribute money, materials and other assets and to ensure that donors receive necessary reports about how their contributions were used. Some public charities also rely on membership development activities to solicit prospective members, collect membership dues, and ensure that members receive promised benefits. Private foundations and some public charities also have expenses associated with making grants and contributions to other organizations and individuals.
Qualified personnel are crucial for providing programs, recruiting and managing volunteers, raising funds, and ensuring proper administration. The costs of compensating personnel, including salaries and benefits, must be allocated to the particular functions they perform for the organization based on appropriate records.
Charitable organizations are required to report separately on their annual IRS Form 990 the amounts they expend on program services, the management and governance of the organization, and fundraising activities. The percentage of an organization’s budget spent on direct program services and the percentage used to manage and govern an organization and to raise the necessary revenues to support its programs and operations will vary substantially depending on its age, size, and type. For example, an organization may devote more resources to raising funds when it is launching a new program or preparing to purchase or upgrade a building. Similarly, an organization may make a greater investment in administrative operations when it is adding new information technology or hiring and training staff and volunteers to offer new or expanded services. Some self-regulation systems and “watchdog” organizations recommend that public charities spend at least 65 percent of their total expenses on program activities. This standard is reasonable for most organizations, but there can be extenuating circumstances, such as those cited above, that require an organization to devote more resources to administration and fundraising. Boards should review budget, financial, and program outcome reports to determine whether the organization is allocating its funds appropriately and making the investments in program, administrative, and fundraising activities necessary to fulfill its charitable mission.