COVID-19 has hit many nonprofits with a double whammy — fundraising has become more important due to a drop-off in revenues, yet the need to cut expenses makes it harder to fundraise. Nonprofits can’t afford to waste a single dollar on ineffective methods. But focusing solely on cost when evaluating different approaches generally isn’t the way to go.
The problem with cost
As stakeholders have intensified their scrutiny of fundraising efficiency, various metrics have emerged to aid their analysis. One common measure compares the amount of contributions with the amount of expenses incurred to generate them, or cost per dollar. Within an organization, the board might take a more granular focus, applying this metric to assess each fundraising method (for example, ticket sales for galas or direct mail campaigns).
The cost-per-dollar metric doesn’t always paint an accurate picture, though. Costs can be affected by a slew of variable, and sometimes uncontrollable, factors, including the “popularity” of an organization’s mission (which can vary based on current conditions), the demographics of its fundraising targets, its age and size, and its financial and accounting policies. This reality can make it difficult to determine the “right” percentage a particular nonprofit should devote to fundraising or which method is the best use of those dollars.
Numbers that count
Authorities such as BoardSource, the Association of Fundraising Professionals and GuideStar have urged a different perspective. While they acknowledge that organizations can overspend on fundraising, they also consider fundraising to be “mission critical.” Efficiency matters, they say, but it’s not everything. To that end, these groups have proposed nonprofits adopt three primary measures of fundraising effectiveness for use inside and outside the organization:
1. Total fundraising net.
This metric shows the amount of money a nonprofit has on hand to spend on its mission because of fundraising efforts.
Total fundraising net = Total amount raised – total fundraising expenses
So, if you spend $150,000 and raise $1 million, your total fundraising net is $850,000.
2. Dependency quotient.
Organizations can become too dependent on a small group of donors. The dependency quotient essentially quantifies an organization’s vulnerability should its top donors decide to redirect their funds. That means the lower the figure, the better off your organization.
Dependency quotient = Total contributions from five top donors / organizational expenses
If your top donors contributed $500,000 over the past three years and your expenses for that period came out to $1 million, your quotient is 50%. If those donors stopped their donations, you would have to find enough replacement donations to cover half of your budget.
Savvy organizations have learned to approach their fundraising as they would their investment portfolios — with a balance of risks and short- and long-term tactics.
3. Cost of fundraising.
As indicated, cost is not irrelevant when evaluating fundraising methods, and a lower cost typically is preferable because it suggests efficiency.
Cost of fundraising = Total fundraising expenses / total fundraising net
An organization that spent $50,000 to generate $150,000 would have a cost of fundraising of 50%.
Multiple metrics matter
Not surprisingly, the metrics can have a bit of an “antagonistic” relationship. For example, the dependency quotient and the cost of fundraising tend to move in separate directions. An organization with a low fundraising cost often is highly reliant on a small number of big donors, while a nonprofit with a broad donor base usually has a higher cost.
This give-and-take is precisely why it’s generally a mistake to place all of your assessment eggs in the cost basket. Savvy organizations have learned to approach their fundraising as they would their investment portfolios — with a balance of risks and short- and long-term tactics. By evaluating different methods holistically, your nonprofit can develop a more cohesive and adaptable strategy.
The big picture
Cost is only part of the effectiveness equation and can present a distorted reflection on its own. Taking a broader view that considers the three metrics above will give you and your stakeholders the sound foundation you need to make decisions, particularly in times of crisis.