In the Almanac, a definition of ‘general charities’ is used to provide estimates for the voluntary sector. The definition is based on common features of non-profit organisations and was originally constructed to also fit ONS national accounting purposes.
Included in the general charities definition are registered charities that meet the following criteria:
- Formality (institutionalised to some extent)
- Independence (separate from the state)
- Non-profit distributing (not returning profits generated to owners or directors)
- Voluntarism (involving some meaningful degree of voluntary participation)
- Public benefit
This definition excludes registered charities that do not meet these criteria, for example sacramental religious bodies or places of worship as well as organisations like independent schools, government-controlled bodies or housing associations.
NCVO recognises the limitations of the general charities definition. It has been a challenge for some time and was identified as an issue in a recent internal review. In years to come, the use of different terms will continue to be the object of discussion and debate, and to reflect changes in the practice and policy context.
Within the Almanac, voluntary organisations are divided into six groups based on their income.
Within the Almanac we use the International Classification of Non-profit Organisations (ICNPO) to describe the activities of voluntary organisations. Organisations are classified into 18 subsectors.
Within the Almanac, income of voluntary organisations is classified by type and source.
Income type describes how the income is obtained:
- Voluntary income: income from donations, grants and legacies
- Earned income: income generated through contracts, membership fees, charity shops, and fundraising activities such as bake sales
- Investment income: income derived from investments
Income source describes where the income comes from:
- The public
- Government (including central and local government in the UK, EU and international governments
- Voluntary sector (including foundations and trusts)
- Private/business sector
- National Lottery
- Investment income
Income from the public
Income from the public is split into four types:
- Donations: Income given freely by the public, mainly charitable donations.
- Legacies: Money that people give to voluntary organisations in their wills.
- Fees for services: Income earned through voluntary organisations providing charitable services – examples include tuition fees for training, micro-credit schemes, selling equipment and services.
- Fundraising: Earned income from providing other services. Examples include the selling of goods in a charity shop.
Types of spending
The Financial Reporting Standard FRS102 requires voluntary organisations to assign their spending to one of three categories. Each of these then include all costs related to that activity, including staff costs, management and administration.
Expenditure on raising funds includes the costs of:
- Fundraising trading, for example costs for organising events, lotteries or running charity shops.
- Generating voluntary income or fundraising costs with direct marketing, seeking grants or contracting agencies to seek funds on behalf of the organisation.
- Investment management costs, eg obtaining investment advice, rent collection, property repairs.
Expenditure on charitable activities includes the cost of:
- Money spent delivering the work that the organisation was set up to do, including governance costs.
Other expenditures include expenditures that fit in neither of the above categories.
There are different ways of considering the effectiveness of fundraising. While the spending on raising funds as a proportion of an organisation’s total spending is often used as an indicator of efficiency, it doesn’t measure return on investment.
In the Almanac we use the following fundraising ratio:
(Voluntary income + income from activities for raising funds) / (spending on raising funds – cost of managing investments)
This ratio considers all voluntary income and the income from activities for raising funds, over the total amount spent on raising funds minus the amount spent on managing investments. We believe this provides a good overall indication of fundraising performance by capturing the full range of fundraising income and costs.
- Net assets: Net assets, or total funds, represent the net worth of a charity and is calculating by using the total assets minus all liabilities.
- Current assets: Assets that can be converted into cash within a year (ie cash in bank, petty cash, money owed to organisations, short term investments, goods for sales).
- Fixed assets: Assets held on a long-term basis. They can be either fixed assets for charitable use (which include buildings and equipment) or investments. They also include intangible fixed assets which is things like intellectual property.
- Reserves: That part of a charities income funds which are freely available.
Liabilities are reported in the balance sheet and they show the money that voluntary organisations owe to others. These can be grants committed in advance, loans, accruals, taxes owed and other creditors.
- Current or short-term liabilities are payments owed in the next twelve months and might include accounts payable (where money is owed because a product or service has been received before a payment is due) or loans.
- Long-term liabilities are obligations due more than a year into the future, and include loans, provisions and pension obligations.
- Pension deficit represents the difference between the value of a pension scheme’s liabilities and the pension assets needed to cover those liabilities.
The contribution to the economy of different sectors is measured by the Office for National Statistics (ONS) based on their production or output (Gross Value Added, GVA), similar to Gross Domestic Product (GDP). Note that contribution to GDP or GVA is not simply equal to turnover.
Although voluntary organisations are included in ONS estimates as part of ‘Non-Profit Institutions Serving Households’ (NPISH), NPISH is not synonymous with the voluntary sector.
NCVO and ONS therefore developed a method of estimating the voluntary sector’s GVA, in the early 2000s. Although it has its limitations, we judge it provides the best indication of the economic value of the sector. The method calculates GVA as follows:
Staff costs + Expenditure on goods and services - Income from sales of goods and services
- Formal volunteering: giving unpaid help through a group, club or organisation.
- Recent volunteers: those who have given unpaid help in the last 12 months.
- References to volunteers’ main organisation: for those who have given time to more than one organisation these respondents were asked to identify the organisation they gave the most unpaid help to (the most time, resources etc.) If they had given time to two equally, they were asked to choose the one they helped most recently