In fact, my conclusion from our research is it’s more likely to be a sign of risk! Low rates can often signal what we called ‘missing costs’ in the research – all the activities required to manage the NPO well and mitigate its risks, that it simply can’t afford, and which don’t, therefore, appear in its cost base and its administration cost rate. Requiring disclosure of an NPO’s administration costs in its accounts under the IFR4NPO Guidance may deepen the pressure to suppress administration costs, in organisations that are already under enormous pressure to make very difficult choices between functions they know to be essential. It might even introduce a reluctance to apply the Guidance. A shift in thinking around administration cost rates is necessary – and the donor community has to actively start signalling that it does not view low rates as a ‘good thing’.
Lastly, learning from the implementation of the UK Charities SORP (Statement of Recommended Practice) tells us that when disclosure of a policy or practice in a particular area is required by the applicable accounting standard, it gets attention at the management level. The research showed how important it was for NGOs to have adequate unrestricted reserves – and therefore to pursue any unrestricted funding sources that may be open to them, including making the case to funders that a portion of a grant – or indeed a whole grant – should be unrestricted. It also showed how critically important good cost recovery policy and practice are to ensuring adequate administration cost recovery from restricted funds. The IFR4NPO Guidance could help to focus both donor and NPO management attention on these areas – by requiring disclosure in the annual report of the NPO’s reserves policy, and of its cost recovery policy and key practices.
Our research showed that good income quality and effective cost recovery practice both seem to be necessary for an NGO to achieve good financial health. One or the other alone didn’t seem to lead consistently to good financial health. In developing internationally applicable financial reporting guidance for NPOs, IFR4NPO can play a big part in making a decisive shift in the funding landscape – so that NPOs can enhance and maintain good financial health.
 The study used a standardised cost classification methodology to assess the cost recovery of up to nine restricted funding agreements (over three years of data) of each NGO.
 Safeguarding refers to the responsibility of organisations to make sure that their staff, operations, and programmes do no harm to children and vulnerable adults, and that they do not expose them to the risk of harm and abuse. It covers both prevention of sexual exploitation and abuse and other forms of potential harm.
 This is the difference between the full and fair share of administration costs that should have been provided by the restricted funding agreement in accordance with the NPO’s administration cost rate , and the administration costs actually provided by that agreement (whether recovered via an indirect cost rate or as direct line items), as a proportion of the full and fair share of administration costs that should have been provided by that agreement.
Siham Bortcosh will be part of a panel discussion being held on June 15 from 10:00 – 11:30 AM ET on the implications of Humentum’s research and the recommendations made in the Breaking the Starvation Cycle report. The other panellists will be:
- Aidan Eyakuze, CEO, Twaweza
- Kathy Reich, Director, Building Institutions and Networks (BUILD), Ford Foundation;
- Tim Boyes-Watson, Global Director, Humentum
- Dr Christine Sow, CEO, Humentum (moderator)
To book a free place, please register here.