The popular trend for judging charities according to the proportion of income spent on overheads is ‘useless’, according to a new report published today by NPC.

In Keeping account: A guide to charity financial analysis, the charity think tank and consultancy explains how funders and others can gain a meaningful understanding of a charity’s financial position, and any risks it might be facing.

The report talks about topics in the headlines this year—from charity chief executive pay and the importance of unrestricted income to charity survival.

Iona Joy, head of Charity Effectiveness at NPC and joint author of Keeping account, said: "NPC knows—and the sector knows—that overhead cost is not a predictor of what a charity can achieve, so it is deeply frustrating that so many charities continue to promote low or apparently non-existent overheads in their fundraising.

"Efficiency is not about spending as little as possible on administration, fundraising, or the salary of top management. Charities have to invest in these functions to be effective. What is important is that the money raised achieves impact. A well-run, efficient charity is more likely to achieve impact.

"Grading a charity’s finances can help to articulate the risk of donating to the charity, as well as highlighting what it could do to improve its financial management or increase its sustainability.

"We recognise that some aspects of financial performance will be more or less out of a charity’s control, and we have plenty of sympathy for charities battling with financial uncertainties associated with government policy over which it has no say.
"On the other hand, charities have a responsibility to serve their beneficiaries, and good financial management is a part of that."

Keeping account: A guide to charity financial analysis is an updated and expanded version of the finances section of NPC’s Little Blue Book, a guide to analysing charities, which has been downloaded almost 8,000 times since its launch in 2010.

The new guide is for anyone who wants to understand the financial state a charity is in, particularly funders looking to decide which organisations to support.

It covers the main questions that need to be asked when doing financial analysis of a charity, including: is the charity financially sound? Are there good processes for financial management? Are financial resources used efficiently? And what are the unit costs of activities?

Throughout the guide, the children’s mental health charity, Place2Be, is used as a case study, providing a step by step guide to their financial statements.

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