RSM New Zealand

Five reasons not to set up an NFP

As seen in Acuity Magazine.

Are there too many charities in NZ and Australia? No matter how well-meaning, setting up a new entity in a crowded market can have many unseen pitfalls, warns charities expert Craig Fisher.

Are there too many charities in Australia and New Zealand? With more than 27,000 registered charities in New Zealand and around 55,000 in Australia, this is a question worthy of some debate. 

No matter how well-meaning, setting up any type of new entity in a crowded market can have its challenges. This article explores some of the issues involved and provides some factors to consider before leaping in.

New Zealanders and Australians are generous people. We have a history of getting involved and trying to fix problems, and in supporting others who do so. We are also pioneering countries and are good at setting things up. But the way this translates to the not-for-profit (NFP) and charity sector is that our two countries have a very large number of, often very small, NFPs and charities. 

Too much of a good thing?

Interestingly, with New Zealand being the smaller of the two countries, it has a much higher charity per capita ratio than Australia. Statistics New Zealand estimates that the broader not-for-profit sector in New Zealand, of which registered charities are a subset, contains over 110,000 entities.

Are there too many charities in New Zealand? was the provocative title of a panel discussion at the recent conference Perspectives on Charity Law, Accounting & Regulation in New Zealand, co-hosted by the Charities Law Association of Australia and New Zealand and CA ANZ. 

“Asking a provocative question like ’do we have too many entities trying to do good in our communities?’ was a great way to kick off the conference,” said Peter Vial, the NZ Advocacy and Professional Standing Leader at CA ANZ. 

This sort of questioning can certainly lead to some emotive debates and elicit strong views. Some see this as a direct attack on the social fabric of our countries and on the concept of a free and civil society itself. A feature of our countries is that we have a right to freedom of association. NFPs and charities exist to fulfil a societal need. However, with respect, asking if there are too many charities is the wrong question. The issue should not be around some mythical “correct” number. But rather; are these entities most effectively meeting the need in an efficient and sustainable way?

Five questions to ask

Here’s a list of five things I think all budding NFPs and charities should think deeply about before they set up.

1.   Don’t under-estimate cost

Compared to some of our counterparts internationally, it can be relatively inexpensive to establish a legal entity in Australia or New Zealand. However, the true ongoing cost is often underestimated. While basic establishment may be relatively inexpensive, the ongoing implications and effort should not be underestimated. This is both financial, i.e. the annual dollar cost to maintain the legal, accounting and other compliance requirements, as well as administrative – the effort that is required to maintain a separate legal entity as regards governance, management and operations.

Many NFPs and charities are set up in the full flush of considerable passion, enthusiasm, and fervour to do good. But if this passion of the founders’ wanes, as it often does when people get tired, the costs of maintaining the organisation still remain. A well thought-through sustainable financial business model is sadly lacking for many organisations in this sector.  

In New Zealand, while an entity may be separate for legal purposes, this does not automatically mean it will be separate for accounting purposes. Therefore, many have found out to their dismay after incurring the cost of set-up, that they still are required by accounting standards to consolidate legally separate entities. Hence, they have not achieved what they wanted.

2.   Economies of Scale

Related to cost is the concept of economies of scale and how effective and efficient an entity can be. Every entity takes a certain amount of administration cost and effort to operate and consumes resources to do so. Hence for entities at the smaller end of the scale, the relativity of the resources consumed compared to the outcomes delivered can sometimes be poor compared to larger entities, where the percentage of resources consumed becomes much smaller. 

3.   Liability

While many entities are set up because of their separate legal liability status, ultimately liability still tracks back to individuals charged with governance. Just because an entity is set up to do good doesn’t mean it is not also still subject to a plethora of laws and regulations to comply with. Sometimes the heavy reality of compliance responsibilities such as Health and Safety, Anti-Money Laundering/Countering Financing of Terrorism are not top of mind for those who are enthusiastic in setting up a new entity.  

4.   Brand confusion

Yet another entity and its brand to confuse the market? There is an argument that the greater the number of entities, the greater the brand confusion (think cancer charities for example) and the greater the splitting of available funding and other scarce resources.  

5.  Is NFP the best vehicle?

Is setting up a traditional structure NFP or charity the best way to address a need? After all, most of our organisational structures are based on traditional hierarchical models that date back to industrial revolution “cogs in a machine” thinking. Is this model now an antiquated way of trying to solve issues, especially if you are trying to attract a millennial generation of supporters? Are there perhaps not other crowdsourced, cloud-type models that may better leverage social media and the power of new innovative ways of working?

While basic establishment may be relatively inexpensive, the ongoing implications and effort (of NFP entities) should not be underestimated. 

 

Craig Fisher FCA, Audit Partner and Chairman of RSM Hayes Audit.

 

Summary

Charities and NFPs are an important part of the fabric of our societies in Australia and New Zealand. But before you rush to establish another one: 

  • Understand why a new entity is needed and ensure there are valid and compelling reasons.
  • Ensure you have explored other avenues – is there already another entity (or entities) doing what you intend doing? Can a better result be obtained by supporting an existing entity.

The aim is a strong, effective, efficient and sustainable NFP and charitable sector. Quality over quantity, please.

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Authors

Craig Fisher
Audit Partner, Chairman - Auckland Central