Budgeting: Make The Most Of Your Charitable Giving
How a philanthropist decides on the amount to give through one of the options identified above would involve a number of considerations. At the heart of it lies the individual’s values; ultimately the philanthropists’ budget depends on the amount available and what the philanthropist thinks is an appropriate amount to give, and the answer to both these questions is driven by her values. Once these broad parameters are set, more specific considerations come into play.
Some philanthropists do not set a specific budget for their giving. The amount they spend in any one year depends entirely on their view of the worth of projects, organisations or causes that they either seek out or that come to their attention. This flexible approach to spending is usually facilitated by a funding stream that comes directly from the philanthropist, whether she makes the donation directly or whether she gifts her Foundation, which in turn manages the grant to the organisation. The value of this approach is that projects are not chosen in order to fulfill the budget allocation but rather, hopefully, on merit. One disadvantage is that it may make it harder for managers and the beneficiaries to plan.
Other philanthropists set a specific budget according to the needs of the projects or programmes and provide these funds by way of annual contributions.
However, most structured giving will rely on a capital donation and use the income from that capital to determine its annual budget. In some instances, that capital lump sum is determined by a bequest in a will. In other instances, the individual or family will arrive at what it regards to be the right amount. For example, NPC’s can hold shares in for-profit companies and use the dividend income to determine its annual budget or a trust can invest its endowment with asset managers and use the annual dividend and interest income to make its grants. This approach meets the needs of a philanthropist that would like to ensure that there is a growing capital sum for the sustainability and long-term growth of the fund.
However, there is flexibility even in this approach. If the trust or NPC is registered as an entity that can receive donations (a PBO in South Africa) it can supplement its income through donations from other family members or friends, through once-off donations from the founder for special occasions and by spending a small proportion of its capital each year while still allowing for reinvestment and growth. For example, some foundations spend 5% of total capital and income per annum.
Another percentage indicator that some philanthropists like to monitor is the amount of the annual budget that is spent on running the trust versus the amount that goes directly to grants. There is quite a range in this regard and economies of scale do help – in most cases the bigger the total budget, the smaller the percentage that is spent on administration because most expenses are fixed. A very proactive, “hands –on” philanthropist/ foundation may very reasonably spend more on managing the foundation and the various grants than philanthropists that take a more “hands-off” approach. The range is usually between 5% and 20% spent on management expenses of the total annual budget.
Finally, even if a philanthropist has established a specific vehicle for her giving, such as a trust or an NPC it is not inevitable that the trust will exist past her lifetime. If the intention is to spend down the trust over a period of years, then the annual budget may be more generous and use significant portions of the capital as well as income.
The philanthropist should also spend some time reviewing and planning the budget over a short and medium time frame (if the philanthropist has decided to have a fixed annual budget). Three to five year (and even ten year) planning may be advisable especially when income streams can increase or decrease year on year and when your commitments over the period are fixed. For example, many bursary or salary support programmes require at least a three to five-year commitment and it is worth spending some time ensuring that the available income covers these and other commitments. Budget planning can also significantly affect one’s strategic planning for programmes and projects and they go hand in hand.
While trusts and NPC’s will have a set of accounts with a balance sheet and financial statements, for operational purposes, a philanthropist’s budget may look somewhat different. An example is set out below.
This article is an excerpt from the first edition of the Toolkit for African Philanthropists published by the African Philanthropy Forum. To learn more about this toolkit, please visit here africanpf.org/publication