Funds allocation in NPOs: the role of administrative cost ratios

Christian Burkart (), Tina Wakolbinger () and Fuminori Toyasaki ()
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Christian Burkart: WU (Vienna University of Economics and Business)
Tina Wakolbinger: WU (Vienna University of Economics and Business)
Fuminori Toyasaki: York University

Central European Journal of Operations Research, 2018, vol. 26, issue 2, No 4, 307-330

Abstract: Abstract Performance measurement of Non-Profit Organizations (NPOs) is of increasing importance for aid agencies, policy-makers and donors. A widely used benchmark for measuring the efficiency of NPOs is the overhead cost ratio, consisting of the total money spent on administration and fundraising relative to the budget. Donors generally favor a lower overhead cost ratio as it ensures that more money directly reaches beneficiaries. Unlike fundraising expenses, administrative costs do not contribute to advertising the actions of an NPO even though they account for a significant proportion of overhead cost. Reducing administrative expenses is a logical consequence from a financial viewpoint, but might negatively affect NPOs through the resulting administrative capacities. This phenomenon is known as “Nonprofit Starvation Cycle”. This work provides an analytical framework for analyzing NPO decision making concerning administrative costs. The paper provides answers to important research questions on the optimal level of administrative spending, the influencing factors and the effects of available information on NPOs. The research shows that focusing on financial performance measurements can result in reduced utility created for NPOs. Less transparency often leads to increased utility for NPOs, but more transparency can increase NPOs’ utility if the information available exceeds a certain threshold. Fluctuating donations are challenging for NPOs’ planning and may impact administrative capacities negatively.

Keywords: Funds allocation; Performance measures; Analytic model; Utility function (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10100-017-0512-9

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