The Charities Review Council maintains a Use of Funds standard, which states that “At least 65% of the nonprofit’s three-year average annual expenses are used to directly support programming (ideal range is 70% to 90%). On an annual basis the board monitors this ratio and, if necessary, develops a plan to address any shortage of investment in programs, infrastructure or administrative capacity”. (Read more about the Council's other standards).
When reviewing a charity's expenses, the Council looks at a three-year average. If three years of expenses is unavailable from the Minnesota Attorney General's database, we average the number of years available.
The Council knows that cost allocation is an inexact science, and not every organization uses the exact same criteria for deciding whether an activity is program, administration, or fundraising. Charities simply need to be able to demonstrate that their allocations are "reasonable," should the IRS ever ask for proof.
Every good organization needs strong administration: an experienced executive director to lead the staff and the governing board, a competent person to look after the charity's finances and accounting, someone to manage the telephone and computer systems and pay the bills. It is reasonable that these staff members' salaries be comparable to similar jobs in the for-profit sector, in order for nonprofits to attract the best people to help further their missions. All of these are legitimate activities, and certain kinds of organizations may require extra administrative care, depending on their circumstances. This is particularly common in small nonprofits, where one person may have a variety of duties, but the portion of time spent on administrative duties is considered an administrative expense.
Each organization must also raise funds to support its mission. This means someone (usually a paid staff person or an outside professional fundraiser) must write the grant proposals and talk with foundation representatives, conduct direct mail and/or telephone solicitations, and write thank-you letters and newsletters to donors who offer their support. Each organization is different – some are older and better known, have missions that evoke an emotional response, or are situated in wealthy locations – all elements that make fundraising easier. Other organizations might be perfectly accountable, but have missions that are controversial or less emotionally appealing, making it harder for them to elicit contributions from donors. Brand new organizations might need to do extra fundraising for the first few years of their existence, in order to help build strong foundations for their programs, thus they may have a higher percentage of fundraising-related expenses.