Man by Salvation Army Poster / Image: Unsplash
Image: Unsplash

How charities work financially

There are over 168,000 charities in the UK, averaging over £10 billion of donations annually over the last few years. However, where does this money go?

Charities have three primary sources of funding: public donations, corporate sponsorship and government grants. How much money they receive from each source depends on the charity and the work they’re doing. For example, the Salvation Army receives most of their money from donations, whereas smaller charities sometimes rely on government grants.

Most charities are run as businesses, with trustees who control and are responsible for the charity like a Board of Directors. Sometimes the charity will have a trading arm, which sells products or services to supplement the charity’s income, such as Age UK, which sells a range of insurances.

In 2017 the Charity Commission issued a stark warning to the National Hereditary Breast Cancer Helpline after it emerged that the organisation had spent just 3 per cent (around £27,000) of its total expenditure on charitable activities in 2014-15

There has been some contention over how charities use their donations and how much goes towards the cause. However, this is not the case for all charities, with Polly Avgherinos, the boss of fundraising website and directory Charity Choice, claiming that: “People are often sceptical about how charities spend their money and how much of the total donations are actually used for charitable work. But it’s a myth that most of the money is used internally or that much of it is wasted.”

Looking at St. John’s Ambulance, for example, we can see that during 2018 over 89% of their donations were spent on charitable activities and, for every £1 they spent on fundraising, they made £2.47. Similarly, Cancer Research UK, during a similar period, spent 75% of their donations on charitable activities and raised £6.85 for every pound spent on fundraising. These are two of the biggest charities in the country, so they may not be representative of every charity, but they do indicate the financial situation of major charities.

The most popular charities in the UK spend anything between 26.2% and 87.3% of their yearly income on charitable causes

Aside from charitable activities, charities spend money on fundraising and governance costs, to raise money and run the charity respectively.

Jane Hobson, head of policy at the Charity Commission, said: “You would not expect to find zero fundraising or administration costs except where the charity is very small-scale and run exclusively by volunteers. Equally, it would need a very good reason for fundraising or administrative costs to take up more than half of the charity’s yearly income.”

The Week reports that the most popular charities in the UK spend anything between 26.2% and 87.3% of their yearly income on charitable causes, but that larger charities should not be penalised for having significant running costs, as they cannot operate effectively without good management and fundraising efforts.

One particular point of contention for many charity-givers is the large salaries of those in charge of charities. For example, in 2018 it emerged that Mike Betts, chief executive of the Motability Operations Group, connected to the charity Motability, which runs a government-backed scheme to provide cars to disabled people, was paid £1.7m in 2017.

Last year The Guardian reported that fewer people are giving to charity after scandals eroded public trust

However, having a properly paid executive team means that they can raise more money through their expertise and connections, which leads to larger donations. To use a slightly extreme example of this, we can look at Bob Geldof and Live Aid; Geldof used his connections to organise a benefit concert in 1985, which involved world-renowned artists, including Queen, Madonna and Elton John. This raised over £100 million, showing the benefit that good connections can bring.

Nevertheless, last year The Guardian reported that fewer people are giving to charity after scandals eroded public trust. Figures from the Charities Aid Foundation (CAF) show that 21% of people explicitly disagree with the statement that charities are trustworthy.

Susan Pinkney, CAF’s head of research, said that the lack of public trust “is a challenge that the entire charity sector needs to tackle head-on and find ways to inspire people to give and demonstrate to them that their money is making a difference.”

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