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Charities and their Management Expense Ratios



So far, we have collected over $250 in donation money though our "Links for Charity" fundraiser.  What exactly is the "Links for Charity" fundraiser?  It's basically a way for Million Dollar Journey to give something back to the community by selling ad space to various sponsors and donating all proceeds to registered Canadian charities.  Without sponsors like RedFlagDeals, Mortgages, and Cash Flow 101 Players, this charitable program would not be possible.  Would you like to participate in this charitable program and be part of the list indicated on the right hand sidebar?  If so, you can contact me here.

Anyways, back to the task at hand, this article will deal with calculating the management expense ratios of charities.  This will help determine if the charity in question is using your donation dollars efficiently.  The basic premise being that the charity should minimize their internal expenses and maximize the amount of money that goes towards the intention of the charity. 

What are these Management Expense Ratios (MER)?

  • Yes, same idea as a MER for a mutual fund, but for a charity.  A charitable organization, like a company, will have supporting or admin expenses like salaries, supplies, advertising and rent.  The goal is to find charities that keep their MER as low as possible to ensure that they're optimizing the use of the donated dollar. 

How do I find the MER of a charity?

  • Most reputable charities will disclose their financial statements to the public, I usually find them on their respective website.  Some charities will disclose their MER on their financial statements, but most won't.  You'll have to calculate them on your own.  More on this below.

How do I calculate the MER?

  • In their financial statements, there will be field that indicates their management and general expenses for the year, then another field that indicates their income.  Sometimes they have their management and general expenses divided into separate categories like salaries, advertising, general admin, travel, or fees.
  • Simply divide the management and general expenses by the income and you'll come up with a percentage, which is the management expense ratio.  Some people like to consider fund raising costs as an expense for this calculation, but I consider this as more of an investment to obtain more donation dollars, so I personally leave them out of the calculation.

Some examples: 

Based on 2006, these are the management expense ratios for a few popular registered charities. 

Charity Expenses
Income
MER
Cancer Society (NL) $143,395 $2,252,841 6%
Alzheimers Society (Canada) $890,636 $11,391,494  7.8%
Janeway Foundation (NL) $159,095 $2,992,663 5.3%

As you can see, not all charities are created equally where some make use of donated dollars more efficiently.  Make sure to do your own due diligence before donating to a charity.  What's your favorite charity?  Have you calculated the MER yet?





19 Comments, Comment or Ping

  1. Being a father twice, I always contribute to children related charity organizations. I should definitely look at their MER’s as most of the time, it is an emotional action and I do not know if the money is well used or not…
    You just brought up a very good point! as alway ;-)

  2. 2. Urbano

    My favorite charity isn’t a charity at all, it’s kiva.org, a microcredit organization that lends the money I “donate” to entrepreneurs in developing countries. This is how it works: I lend an amount, say $50.00 to a woman in Kenya. Kiva charges me an additional fee of $5.00 to cover their admin costs. When the entrepreneur repays my loan, I have the choice of taking my money back or lending it to someone else. I’m very excited to be involved with this organization and hope others will look into it as well.

  3. 3. Telly

    I have a couple friends that work in non-profit and we recently had a discussion about charity giving. Like FB, I have always felt more inclined to give to child related charities. It turns out we’re not alone.

    Children’s Hospital and the like have a much easier time raising money than charities such as Canadian Mental Health and Lung Cancer Canada – which generally tend to have a stigma attached to them. It really is unfortunate because there are many great charities out there that have a hard time getting funded.

    I keep telling myself I will pick a new charity each year and make regular contributions so that I can spread my money around to many people in need. Yet, month after month, I find my direct donation withdrawal going to UNICEF. I can’t help but think that basic running water has to be the most important gift I can give. Maybe this month I’ll add another charity.

    Thanks for the reminder FT. I think this is a very important post. Those of us that can afford to help, in even a small way, should do so. In our quest to financial freedom, knowing we helped others along the way can be very rewarding.

  4. 4. Robin H

    You can search for registered charities on the CRA website:
    http://www.cra-arc.gc.ca/tax/charities/menu-e.html

  5. 5. Gates VP

    Hey, surprise, suprise, you’ve hit a nerve… I devolved into another blog post :)
    http://gatesvp.blogspot.com/2007/08/donating-money.html

    I haven’t been really big on donations and it’s part MER, part philosophical. I used to work for the YMCA (which is basically a charitable organization and pays that way), but I continued to work there even after getting a pay raise elsewhere b/c it had the greatest people to work with.

    From an MER perspective, big charity organizations have all kinds of overhead issues and donating money to an group means that you’re effectively empowering that group to take decisions you may not agree with. If I donate $500 to the Cancer Society, where does that money go? If I have a deep-seeded belief that future research money should go into retro-virals (say b/c I don’t “believe in pills”), the Cancer Society may not share that belief, heck they may spend most of that money researching new pills and chemotherapy mixes, which is exactly what I don’t want them to do.

    Take a look at the Red Cross during 9/11 (and other crises on a smaller scale). Millions of dollars were donated to the Red Cross as part of a knee-jerk reaction but nobody knew where it was going or what it was for, they just donated.

    And this is where we venture into the philosophical.

    Why am I donating to the Cancer Society or the MS Society or Breast Cancer or any of these Hospital Research Foundations?

    “Curing” cancer is undoubtedly a noble goal, but why do they need my donations? Don’t they already get government grants, aren’t we already paying for these in some way? And if we’re not when do we switch it over? Why do we authorize big drug companies to do Cancer Research when they have conflicting interests with the public good? Drug companies spend 15% on R&D and 85% on Marketing & Advertising and they have no interest in curing people b/c it’s not good for their investors. Cured people do not bring in as much money as people who “remain sick” while they’re not using your drugs. Now any publicly traded company is required by law to be acting in their investors’ best interests. So we’re actually requiring drug companies to behave in a manner that isn’t good for public health AND we’re applying free market concepts to a system that isn’t ruled by supply and demand (see Hospital Bills in the US).

    When I donate money to a “healthcare”-related field, I’m basically just throwing more of my money into the already bloated and poorly-designed healthcare field. So obviously, I have some philosphical reservations about making donations (despite losing 2 family members to cancer in the last 2 years).

    By the same measure we get groups like Make Poverty History (no, you’re not getting a link), that hire on tons of big stars but have this horrible, unsustainable plan. I want to make this clear, I spent one hour on their site, a site dedicated to “Making Poverty History” and I did not find one definition of Poverty, not one. Most systems use some type of sliding scale: i.e.: everyone making less than X is poor, but that makes it pretty tough to eliminate poverty b/c it’s a sliding scale! They have a goal that is basically impossible (like the War on Drugs), so they don’t get any of my money!

    Same goes for most of the “help the poor” type of groups. Given the unfit definitions of “poor”, giving money to these organizations is pretty sketchy. I mean, we’re already paying money into the welfare (EIA) system and numerous government subsidy programs at the provincial and federal level. So we’re already donating tons of money to help those less fortunate, shouldn’t we be more scrutinizing of the programs we’re already paying for before we offer more money?

    Truth is I haven’t donated money in a few years, b/c I just can’t find people I’d like to give to. My fiancé and I have discussed Kiva a couple of times, and that’s probably my only good lead, b/c you’re not actually giving, you’re helping people help themselves.

    At the end of the day, I’ve come to a pretty simple personal conclusion: I don’t believe in giving money (with maybe Kiva as the exception). I believe in giving time and stuff, especially for those who are less fortunate. Money is corruptible (very liquid) and often hard to trace. Money is not the type of thing we want to give those who are less fortunate. We want to give a means of survival to those who are less fortunate so that they can earn the money to support themselves.

    I don’t want to send a million dollars to Kenya to build a new school. I want to send a boatload of building supplies and a pair of contractors to help the Kenyans build their own school. Heck we could even earmark the money to pay the Kenyans. I don’t want to give money to a country that just lost 100,000 people in a landslide, they don’t need money. They need a flotilla of medical supplies, foodstuffs, blankets, clothes and building materials and that’s what they should get.

  6. Another great response Gates. Can’t say I agree with everything you say, but I can understand your point of view.

  7. 7. Gates VP

    Thanks for the feedback FT… I’ll admit that my ideas on charity aren’t fully cooked and there’s definitely a lot of space for disagreement.

    Despite first appearances I actually really love donation and volunteering, I just haven’t found the right targets for my time :(

  8. 8. quanta

    This is a brilliant idea – I wonder if we could altogether compile a list of charity MERs. Charities SHOULD have the same scrutiny as for-profit companies, as you are in fact “investing” in their cause.

    I’ve heard horror stories of some multinational charities who spend their money outfitting their staff with $70,000 Land Rovers in order to combat famine in Africa. Or those who spend 60% of their budget on a splashy TV commercial.

    One charity that I like is Room To Read (MER: 12%) – it builds schools and libraries in developing countries in the way Gates VP desires – the charity brings the supplies and expertise, but expect in-kind support from the village. They do not assist those who do not put some skin in the game. Instead of Land Rovers they hire local drivers and transport, whether it be car, motorcycle or yak.

    The founder is an ex-Microsoft executive, so they are very keen on accountability – they publish an annual report and audited financials.

    P.S. According to the BBB, charities should keep their overhead ratio at 35% or lower. So all three of FT’s charities listed above are running quite efficiently indeed.

  9. Quanta, note the MER’s that I calculated may be artificially lower because I don’t count fund raising expenses as part of the calculation. I only count, Salaries, General and Admin, supplies and advertising.

  10. 10. quanta

    Then the “MERs” (actually known as the Overhead Ratio in charity-speak) should have total expenses factored in. Without fundraising expenses, for example, Room to Read weighs in at 5%.

    There are watchdogs for US charities that calculate overhead ratios (i.e. CharityNavigator.com) but I don’t see any for Canadian ones.

  11. 13. longtime charity worker (US)

    Thanks for reminding us to give. I think we can never be reminded enough!

    Expense ratios are a crude measure of a nonprofits effectiveness or efficiency. Some of your local, small charities may have to spend more on “overhead” and fundraising while they grow, get their name known and expand. While few organizations are as “awarded” at Doctors w/out Borders (I give to them every month), I would recommend you use industry awards (NYTimes, Fast Company, etc), and gifts from big foundations (Gates, Robin Hood) as an indicator that the group is sound. Foundation staff turn an organization inside-out to ensure they do good work. Awards like the NYTimes have a committee of experts in philanthropy that screen and select winners.

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