Funds allocation in NPOs: the role of administrative cost ratios

Burkart, Christian and Wakolbinger, Tina and Toyasaki, Fuminori (2018) Funds allocation in NPOs: the role of administrative cost ratios. Central European Journal of Operations Research, 26 (2). pp. 307-330. ISSN 1613-9178

Available under License Creative Commons: Attribution 4.0 International (CC BY 4.0).

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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.

Item Type: Article
Additional Information: Open access funding provided by Vienna University of Economics and Business (WU).
Keywords: Funds allocation, Performance measures, Analytic model, Utility function
Divisions: Departments > Welthandel
Version of the Document: Published
Depositing User: ePub Administrator
Date Deposited: 28 Dec 2017 12:06
Last Modified: 11 Jul 2019 13:00
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