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Calculating the Cost of Fundraising

By Nell Edgington



Calculating the Cost of FundraisingThere’s a rampant misconception that a successful fundraising event can be the answer to a nonprofit’s money woes.  That is sadly not the case. Events do not make money for nonprofits.  Sure, they might generate some gross revenue, but when you look at the net revenue raised and the cost to raise a dollar, they break even if you are lucky and lose money if you are not.  And those two calculations, net revenue and cost to raise a dollar, if employed by more nonprofits, could transform how effective fundraising could be.

Let me give you an example. Let’s pretend that a nonprofit with a $500,000 annual budget throws an annual gala with a band, nice catering, and an auction.  They have a staff member that spends half of their time getting the event together, and there is a board committee that helps sell tables and provides oversight for the event.  At the end of the event the organization grosses $100,000.  They are thrilled that they have made 20% of their annual budget in one night, right?

Wrong.

Let’s dig a little deeper.  They have grossed $100,000, but what did it cost them to raise that money?  The direct expenses for the event (the band, location, food, decorations, invitations, etc) cost $50,000.

But they also need to factor in the indirect expenses.  Their event coordinator spent half a year preparing for this event. Their Executive Director came to some meetings, met with the event coordinator, made phone calls to invite people and other activities.  The Development Director also worked on the event.  And the board committee put in many hours on the event.

So if we calculate the hourly rate of those staff member’s time (salary and benefits) and multiplied it by the hours they each worked, we’d get the cost of their time.  We also need to do the same for board members.  We can use the standard value of volunteer hours ($20.25) multiplied by the number of board members who worked on the event and the average number of hours they spent.

If we add all of this up we get:

Event Coordinator: $15,000
Executive Director: $4,000
Development Director: $5,000
Board Members: $3,000

Total Indirect Expenses: $27,000

So the total of the direct expenses ($50,000) plus the indirect expenses ($27,000) is $77,000.

Now, here’s where it gets interesting.  First of all, you see that the net revenue on this event is only $23,000 ($100,000-$77,000 = $23,000).

But how much did it cost to raise that $23,000?

It cost $77,000 to raise $23,000, or if you boil it down it cost $3.35 to raise $1.00.  That’s insane, right? Although this organization actually made money, the cost of making that money is far larger than the money they made.  And how does the cost of making this money compare to their other fundraising activities?

If nonprofit leaders understood the net revenue and cost to raise a dollar of every fundraising activity they engaged in, they could determine the most effective use of fundraising resources and could focus their resources on those activities.  The bottomline revenue to the organization would increase dramatically, while fewer resources would be expended on low net revenue activities.  It could be transformative.

So let’s take another example. An organization hires a major gift officer at $65,000 per year plus benefits who raises $500,000 per year in major gifts.  If you include in major gift activities the costs for the Executive Director’s and board members’ time to go on fundraising visits and send thank you letters the total indirect and direct costs for major gift fundraising would be $100,000.  So the net revenue ($500,000-$100,000) would be $400,000.  And the cost to raise a dollar would be ($100,000/$400,000), $0.25, so it takes a quarter to make a dollar.

Then if the nonprofit compared that cost to raise a dollar to the $3.35 cost to raise a dollar with a gala, they could make a conscious and reasoned decision to forgo the fundraising event and focus more efforts on major gifts.  They could take the $77,000 they spent on the fundraising event and hire another major gift officer.

I’m not suggesting that nonprofit events go away completely.  I think they absolutely have a place as friend-raising, stewardship, and cultivation activities.  An event can be a great way to celebrate the impact an organization is having and get more people to learn about them, or to thank donors who have been instrumental in the results an organization has achieved.  But in terms of pure revenue-raising abilities, fundraising events are very inefficient.

And a sure path to greater efficiency begins with analyzing the effectiveness of your current activities.  I’d love to see more nonprofits run the numbers on all of their fundraising activities and then making some hard choices about the best use of resources.  The end result could be more money at less cost.

If you want to learn how to calculate the cost of fundraising for your events and activities, download the Calculating the Cost of Fundraising On Demand Webinar.


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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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19 Comments to Calculating the Cost of Fundraising

[...] This post was mentioned on Twitter by changefeed and Nell Edgington, givv.org. givv.org said: RT @nedgington: ineffectiveness of #nonprofit #fundraising: http://bit.ly/1Kj9jT – @givv thinx this is why regular monthly giving is the key [...]

Jason
October 27, 2009

This is a really nice piece and it’s really insightful. To extend the thought a bit, the $77k spent can be netted out against the $23k raised to leave about $54k that could have gone to the mission, to marketing, or elsewhere – but in any case is not. In other words, the value of the “intangibles” from the event had better be $54k or higher, or else the event was not a successful one.

At givv.org, we believe there’s another type of donor, and another way to support nonprofits – through small “microgifts” made monthly and automatically to all the organizations a person supports. At Givv.org, a giver sets up one budget, then splits it among as many (1, 10, or 100) nonprofits as she wants.

This means she can support everything she likes, easily, and add and remove new ones with a few clicks. Donors to one organization can easily “spread” the donation to other, similar organizations. This means more giving gets done, and people give.

A nonprofit should be trying to grow donations from both the major donors and the minor donors, simultaneously, so as to have the most stable revenue stream. Microdonors are low-maintenance, and support you regularly without a lot of handholding. Check out givv.org to get the idea.

Darryl Swain
October 27, 2009

I couldn’t agree more. We teach nonprofits this fundraising truth in each of our major gifts classes. Special events are most often best left for publicity and prospecting for larger donors. Take a look at my personal blog for complimentary advice. http://excelfundraising.ning.com/profiles/blog/list Thanks for your great article!

Nell Edgington
October 28, 2009

Jason,

I agree with you that nonprofits need both small and major donors to survive and thrive. I had not heard of givv, but it sounds like an interesting idea. I love the idea of micro-gifts and micro-philanthropy and think they hold a lot of potential for the sector.

I think the bottomline is that nonprofits need to be analytical and strategic about all of their fundraising efforts in order to ensure that they are making the most efficient use of their resources.

Nell Edgington
October 28, 2009

Darryl,

Your series of posts on major gift fundraising are really well done. That’s a great resources, thanks for sharing!

Tim Tracey
October 28, 2009

Hi Darryl,

Your point is the reason we created YouGottaCall. It’s our dream to provide not-for-profits with a recurring and self-sustaining stream of revenues with zero cost. Not even postage.

Sound crazy? Maybe. It’s certainly a unique – and patent pending process.

I hope in 6 months we’ll have some serious success to report.

– – Tim

Benjamin Light
October 30, 2009

I think you make some excellent points in your posting. I take issue with two things. First, I don’t think you can factor in the time Board members spend as an indirect expense. You are not actually paying them so that is not truly money that needs to be spent. Or, you have to factor in the time of all other volunteers who work on an event as well (which I do not believe you should).

Second, this is a good example when you are talking about an event that is expensive to host (like a gala or a golf outing). Our organization puts on a walk each year and our expenses are relatively low (costs us around $55K including paying a consultant to handle most of the details). Even if you would factor in staff time (which we do not when calculating our net revenue), we still spend less than $100K to generate gross revenue over $350K. This calculation also does not include the community building aspect of our event. We bring out over 3,500 people to a family friendly event that celebrates our organization on one day. The energy generated by the event carries us for months. We gain new donors who become regular supporters and educate hundreds of people about our mission. Not to mention all of the people who raise money on our behalf.

I think events are a double edged sword. If you raise $100,000 (gross) and only end up with $23,000 net, you have probably wasted time and money. But if you host an efficient event with low expenses and significant benefits to the community, you have the potential to be extremely successful.

Nell Edgington
October 30, 2009

Benjamin,

Thank you for writing. I appreciate your arguments, and I’d like to drill down on them a bit more. First, you argue that because a nonprofit doesn’t pay board members for their time, that cost should not be factored in to the expenses of the event. Although you are not paying board members cash, there is an opportunity cost to their time. Let’s say a board member spends 20 hours getting decorations for an event, sending invitations, making phone calls. That is 20 hours that they will now not be able to spend on cultivating a major donor, working on program strategy, making alliances for growing the organization, etc. A nonprofit needs to view their board members as a resource just like any other (staff, funding, etc.) and whenever they employ that resource they need to calculate the return on that resource. Quantifying a board member’s (or any other volunteer’s) time by attaching a dollar amount to it allows you to analyze the best use of that resource.

To your second point, I absolutely agree that there can be benefits outside of money that events can bring to a nonprofit. And I actually argue that it is those benefits (raising awareness among your target audience, thanking supporters, cultivating major donors, etc.) that are what events should be for, rather than raising money. But find a way to get those benefits without spending $100K. Let me give you an example. When I was at KLRU, Austin’s PBS station, we started inviting audiences into our tapings of local TV shows. There was no direct cost to us for these events and just a few hours of staff time were the only indirect costs. And we didn’t raise any money, but these events were invaluable in getting people in our doors, demonstrating the value that KLRU had, getting people excited about and knowledgeable about our work, etc. And they were open to major donors and prospects only, so they had an exclusive feel, but also were a way for us to cultivate donors. They were tremendously successful events. My point is that you can have those “intangible” benefits from events, but achieve them at a much lower price point than $100K.

Darryl Swain
October 30, 2009

When calculating the “true” cost of fundraising many organizations, knowingly or unknowningly, do not include all costs. Too many report 90-100% of every donation goes to serving those in need. Plainly said, this is just not realistic when it comes to any organization, especially those using special events as their primary fundraising vehicle.

Here in Canada, the national average for cost per dollar raised for Special Events is $0.54 per $1.00 raised. This usually only includes direct event operation expenses! Staffing costs are an additional 57% of operation expenses, or $0.31 for an event. Bringing the avergae total event cost to $0.85 per dollar raised. A 15% profit margin. And this doesn’t account for Board, volunteer, inkind donations or other “off the books” expenses that are never counted.

If you count all expenses, events as fundraisers becomes questionable and only very few a very profitable. They are doing a great job! However, even when counting only event operation expenses ($0.54), events are nowhere near as profitable as major gifts or planned giving ($0.05 to %0.10 cost per dollar raised) as fundraising methods. With these other methods being five plus times more profitable than events, where do you really want your Board, staff and volunteer time being spent? The kicker is that almost all charities run special events while only 9% use major gifts and 4% use planned giving.

Then again, if a private company turns a 15% profit margin, this is considered a fairly good return by the public eye. I think the public eye has totally unrealistic expectations of all charities…but that is really a whole other issue.

Nell Edgington
November 3, 2009

Darryl,

Thanks for the data on Canada, it sounds like your nonprofit sector is in a very similiar boat, with a focus on low ROI events as opposed to high ROI major and planned giving programs to raise dollars.

I completely agree with you that the public has a totally unrealistic view of how nonprofits operate and what percent of their revenue should go to fundraising and other “administrative” expenses. I think the answer to that, as well as the low-ROI fundraising efforts, is for nonprofits to become more analytical about their fundraising costs (and all operating costs) and then become more articulate and clear with donors about those costs. Let’s stop pretending that its ok to spend as little as possible on operations, fundraising, and infrastructure and let’s start getting to the true costs of the work nonprofits do (both program and operating work). Both are critical to effectively achieving social impact.

Nancy Egan
August 7, 2012

We are in the process of a captal campaign for our local library which is a partnership between the city and the Friends of the Library. I’m confused by the numbers generated by our fundraising team. They seem to think we’ll need around $600,000 annually to run the library – including personnel, media, etc.

I can’t find a calculator that tells me how much this means we’ll have to raise as an endowment to generate this amount.

Thanks!

Nell Edgington
August 7, 2012

Nancy, I imagine you would need an endowment of around $15,000,000 to generate a $600,000 annually. Try this calculator: http://treasurer.syr.edu/endowcalc.cfm

However, I would caution that that is a huge campaign to take on. And endowments are not easy money to raise. You might be interested in this post I did recently about endowments: http://www.socialvelocity.net/2012/06/financing-not-fundraising-kiss-that-endowment-dream-goodbye/

Instead of raising a $15M endowment campaign to feed your annual operating expenses, I would encourage you to create a sustainable, diversified financial model. Good luck!

paul jolly
May 8, 2013

I agree absolutely. The most effective events are small gatherings (20 or less people), in the home of a donor, with a mix of friends of the host and current supporters. VERY short presentation, and lots of mingling. In a gathering that size, the staff and board members have a chance to circulate, talk with virtually everyone in the room, and plant seeds for further discussion. The key is that the host must be able to invite potential donors of some means, with likely interest in the work of the organization. Cost: next to zero. Staff time: a few hours. Benefit: a truckload of increased loyalty from existing donors, and a handful of new prospects.

Nell Edgington
May 9, 2013

Paul, I agree absolutely. Nonprofits should use events as a way to cultivate potential donors as opposed to a negative ROI transactional activity.

Matthew Moses
May 14, 2013

Thank you for this post. You bring up some excellent points about the efficiency/inefficiency of fundraising in the non-profit industry which is something that is not talked about enough.

I have written on this very subject and offer a solution for non-profits to develop a more efficient model while also developing a deeper relationship with donors. You can check it out here http://pifapparel.com/blog/a-new-fundraising-paradigm-should-npos-let-advocates-take-over-fundraising-efforts-so-that-they-can-focus-more-of-their-resources-on-making-an-impact/ if you would like to continue the conversation in a way that address possible solutions to the problem.

Nell Edgington
May 15, 2013

Matthew,

Thanks for the comment and the link to your blog post. I’m a huge believer in mobilizing supporters to raise money, advocate and otherwise build support for a cause. Beth Kanter (The Networked Nonprofit) talks about this idea at length and how nonprofits must open themselves up to this new era of “free agents” who can tap into their networks to build support for a nonprofit. So you and I are very much in agreement.

Danielle Siembieda
May 20, 2013

I’m glad you laid this out. What would be a good tool, (maybe someones already thought of this) is a fundraising calculator where you could put in costs and see how much you need to make in return. It would have things like volunteer hours, staff time, etc.

Nell Edgington
May 20, 2013

Sounds like a great idea Danielle! Let’s hope someone creates it.

[…] Bummer, I know.  And if you don’t do this, all the hard work will be for very little.  If you don’t believe me, consider the cost to raise a dollar. […]

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