I think basic accounting ratios and financial analysis are quite helpful for getting a basic view on return on donations and high level valuations of charities.
However, I do think this post underrates the value of assets.
Increased cost effectiveness over time usually comes from investment in quality assets (I’d include staff costs as assets - for management accounting purposes not for external financial reporting purposes).
Does AIM publish any estimates on the valuation of its IP and other intangible assets?
I think there was a conservative counterfactual estimate of the value of a founder somewhere too.
I’d say there’s a decent number of highly effective charities with very valuable IP that are too leveraged on the output of very few staff members.
This makes them riskier and more exposed to shocks.
Quite frankly I’d rather they fundraised more than they needed and hired extra staff / had more in reserves for contractors than continue to run lean.
This is an important argument and makes a lot of sense.
“I’d say there’s a decent number of highly effective charities with very valuable IP that are too leveraged on the output of very few staff members.”
I agree with this, apart from the word “too”. I’ve got no issue with a few talented people carrying an organisation—I think that’s just how both charity and business often work for a long long time. How much of Apple’s value was in Jobs and Wosniacki even after they were worth billions? How much of their current value is still a legacy of the style and philosophy they built?
This next statement though I think makes sense in theory and I agree to some extent. But I’ve seen the opposite happen most of the time.
“Increased cost effectiveness over time usually comes from investment in quality assets (I’d include staff costs as assets—for management accounting purposes not for external financial reporting purposes).”
I think this is more the case in the business world as incentives are unfortunately so cooked in the charity world that as organisations grow , it’s hard to avoid very poorly performing staff getting paid way too much and for too long. We need to invest in staff to grow an organisation, and it’s probably just the right thing to do by our fellow human, but unfortunately I’m not convinced it always makes us more cost effective. I would be interested to hear what examples your have of charities that you think have become clearly more cost effective through investing unusually heavily in staff? Although this might be an unfair question so it’s hard to separate that it out.
Often as well I’ve seen in my org in UgAnda, if I invest heavily in good staff (which we do) they are more likely to get a higher paying job in the NGO or government sector so often the investment doesn’t pay off for us. I’ve seen a number of cases too not in our org where super talented staff were funded for extra study which then directly enabled them to get a better paying job somewhere else. It’s complicated. In Western EA orgs where you might have the luxury of relying partly on value alignment this situation might be very different. There’s loyalty here but often more to to individual people than a value structure or org.
In my experience with NGOs, staff salaries and “investment” in staff usually end up increasing often to the detriment of the cost effectiveness of the org. Again I’m not saying it’s the wrong thing to do. Just observing.
basic accounting ratios and financial analysis are quite helpful for getting a basic view on return on donations and high level valuations of charities.
Strongly agree. When I took a financial accounting course, learning about the ratios was the moment when my eyes really opened up and I saw how I could use these tools to make comparisons.
Pretty interesting consideration; it is one I have not thought about/modelled that much. I wonder if someone could do a simple version of this by considering willingness to pay—e.g., how much would a different charity would pay for a given piece of IP? My guess, though, is that many things would be relatively low value compared to the yearly org costs (e.g., I’m not sure someone would pay more than one year of our AIM yearly budget for all our IP).
The biggest intangible asset that comes to mind, which I have not seen modelled much, is the implicit staff training that happens in certain jobs. E.g., if the average staff member goes on to a career five times higher than the jobs they were getting offered before, something quietly valuable has probably happened over their tenure. Shoutout to Founders Pledge for this, as I feel like I see a ton of really valuable people entering the EA job world via Founders Pledge. I think often the counterfactual is that they would get far less impactful jobs than they do post-working for FP.
Useful post.
I think basic accounting ratios and financial analysis are quite helpful for getting a basic view on return on donations and high level valuations of charities.
This is a decent high level overview: https://www.investopedia.com/terms/f/fundamentalanalysis.asp
However, I do think this post underrates the value of assets.
Increased cost effectiveness over time usually comes from investment in quality assets (I’d include staff costs as assets - for management accounting purposes not for external financial reporting purposes).
Does AIM publish any estimates on the valuation of its IP and other intangible assets?
I think there was a conservative counterfactual estimate of the value of a founder somewhere too.
I’d say there’s a decent number of highly effective charities with very valuable IP that are too leveraged on the output of very few staff members.
This makes them riskier and more exposed to shocks.
Quite frankly I’d rather they fundraised more than they needed and hired extra staff / had more in reserves for contractors than continue to run lean.
This is an important argument and makes a lot of sense.
“I’d say there’s a decent number of highly effective charities with very valuable IP that are too leveraged on the output of very few staff members.”
I agree with this, apart from the word “too”. I’ve got no issue with a few talented people carrying an organisation—I think that’s just how both charity and business often work for a long long time. How much of Apple’s value was in Jobs and Wosniacki even after they were worth billions? How much of their current value is still a legacy of the style and philosophy they built?
This next statement though I think makes sense in theory and I agree to some extent. But I’ve seen the opposite happen most of the time.
“Increased cost effectiveness over time usually comes from investment in quality assets (I’d include staff costs as assets—for management accounting purposes not for external financial reporting purposes).”
I think this is more the case in the business world as incentives are unfortunately so cooked in the charity world that as organisations grow , it’s hard to avoid very poorly performing staff getting paid way too much and for too long. We need to invest in staff to grow an organisation, and it’s probably just the right thing to do by our fellow human, but unfortunately I’m not convinced it always makes us more cost effective. I would be interested to hear what examples your have of charities that you think have become clearly more cost effective through investing unusually heavily in staff? Although this might be an unfair question so it’s hard to separate that it out.
Often as well I’ve seen in my org in UgAnda, if I invest heavily in good staff (which we do) they are more likely to get a higher paying job in the NGO or government sector so often the investment doesn’t pay off for us. I’ve seen a number of cases too not in our org where super talented staff were funded for extra study which then directly enabled them to get a better paying job somewhere else. It’s complicated. In Western EA orgs where you might have the luxury of relying partly on value alignment this situation might be very different. There’s loyalty here but often more to to individual people than a value structure or org.
In my experience with NGOs, staff salaries and “investment” in staff usually end up increasing often to the detriment of the cost effectiveness of the org. Again I’m not saying it’s the wrong thing to do. Just observing.
Strongly agree. When I took a financial accounting course, learning about the ratios was the moment when my eyes really opened up and I saw how I could use these tools to make comparisons.
Pretty interesting consideration; it is one I have not thought about/modelled that much. I wonder if someone could do a simple version of this by considering willingness to pay—e.g., how much would a different charity would pay for a given piece of IP? My guess, though, is that many things would be relatively low value compared to the yearly org costs (e.g., I’m not sure someone would pay more than one year of our AIM yearly budget for all our IP).
The biggest intangible asset that comes to mind, which I have not seen modelled much, is the implicit staff training that happens in certain jobs. E.g., if the average staff member goes on to a career five times higher than the jobs they were getting offered before, something quietly valuable has probably happened over their tenure. Shoutout to Founders Pledge for this, as I feel like I see a ton of really valuable people entering the EA job world via Founders Pledge. I think often the counterfactual is that they would get far less impactful jobs than they do post-working for FP.