calculating the cost of fundraising
There is a calculation (in addition to the cost of fundraising which I’ve discussed before) that I would love more nonprofits to do. And that is to calculate the opportunity costs of a decision.
An opportunity cost is the value (money, time, resources) of the next best option when you make a choice between two options. Understanding the opportunity costs of decisions is particularly important when resources are scarce, as is the case in the nonprofit sector.
And it is the topic of today’s installment in the ongoing Financing Not Fundraising blog series.
In calculating the opportunity costs, you are consciously analyzing two or more options and quantifying the value of the next best option when you choose one option over the others. So, for example, when you are choosing between two new jobs you’ve been offered, you recognize that in choosing one position you are giving up the value (or salary) of the other position. It seems so simple, yet in the nonprofit world it becomes much more complex.
Because the nonprofit sector is under capitalized, money is king. A driving motivation in many nonprofits is to preserve money, or go after money, at all costs. So the concept of opportunity costs is often ignored. But if we truly want to put every last nonprofit resource to its highest and best use, we must understand opportunity costs.
Opportunity costs are calculated like this:
Opportunity Costs of Option #1 = The long-term benefits of option #2 – the long term benefits of option #1
If the opportunity costs for a particular choice are positive, you have not chosen the best (most valuable) option.
Let me give you a couple of examples of how opportunity costs can be calculated in the nonprofit world.
Fundraising vs. Friend-Raising Event
This decision came up for one of my clients the other day. They were going to host an event at a board member’s house with 25 potential major donors. They were hesitant to use the event just as a group cultivation of major donors, so they were grappling with the idea of asking attendees to make a $100 donation while at the event (a total of $2,500 in revenue). That would have been a huge mistake because of opportunity costs. If cultivated correctly over the coming year, the attendees all had the capacity to give much larger donations, probably an average of $5,000 per attendee (a total of $125,000 in revenue). But if those attendees were forced to make a $100 donation, they would be done with their giving to that organization for the year.
The opportunity cost of the fundraising event would be:
$125,000 (value of the friend-raiser) – $2,500 (the value of the fundraiser) = $122,500
In other words, in deciding to hold a fundraising event, instead of a friend-raising event, the nonprofit is giving up $122,500 in value.
Needless to say, they decided to make the event purely a friend-raiser, with no fundraising ask. However, it goes without saying that they now need to be sure to do effective follow up cultivation and eventually solicitation with every attendee to the friend-raiser.
Grantwriter vs. Development Director
If a nonprofit leader is deciding whether to spend $45,000 to hire a grant writer or $75,000 to hire a development director they might opt to hire the grantwriter because that is the cheaper option, and in the world of nonprofits, cheaper is always better. But in hiring a grantwriter, the nonprofit would save $30,000 in regular costs (the difference in salary between a development director and grantwriter), but lose many times that amount in long-term benefits. The difference in revenue brought in under the development director, someone who could increase the overall financial engine of the organization, could be in the hundreds of thousands and many times the value of the grantwriter, who would only be able to increase foundation and/or government funding.
So the opportunity costs of hiring a grantwriter would be:
$250,000 (estimated annual increase to overall giving with a development director) – $30,000 (additional cost of the development director salary) – $100,000 (estimated annual increase to foundation giving with a grantwriter) = $120,000
In choosing the “cheaper” grantwriter, the nonprofit is losing $120,000 in value.
I would love to see more nonprofits calculate the opportunity costs of all decisions they make. Indeed, because nonprofits are so constrained for resources they should be even more cognizant of opportunity costs and ensure that every last resource is put to its highest and best use.
If you want to learn more about moving from a fundraising to a financing approach at your nonprofit, check out our on-demand library of Financing Not Fundraising webinars, guides and e-books.
Photo Credit: Krzysztof Poltorak
I can’t tell you how often I hear nonprofit leaders complain about how difficult it is to raise money, how tired they are of banging their head against the wall, how difficult this economy is. Well, there really is a better way. And it starts with a really good money plan for your organization. But again and again I see the same mistakes being made in nonprofit fundraising plans, which is the topic of today’s installment of our regular Financing Not Fundraising blog series.
If you’re new to the series, our Financing Not Fundraising blog series shows nonprofits how to break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities and instead work to create a broader approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.
Here are the 7 mistakes to avoid in your fundraising plan:
- Not Having A Plan At All. Yeah, not even having a plan is a huge mistake. It boggles my mind how many nonprofit organizations expect that money will magically appear at their doorstep. It takes an overall money strategy, what I call a Financing Plan, to effectively marshal your resources (staff, board, other volunteers, technology, materials) so that enough, and the right kind of, money comes in the door to achieve your goals.
- Creating Just A One Year Plan. You cannot expect to create a financially sustainable organization if you are only planning for money one year at a time. Your financing plan should project at least 3-years into the future in order to ensure that you have sound financial footing from which to operate. A true financial strategy takes a long view and plans accordingly.
- Including Only Private Dollars. Your money strategy must include ALL sources of money flowing to your organization, making it a Financing Plan. You cannot just plan for individual, corporate and foundation dollars, you also must plan for how government and earned income sources will flow, if they are appropriate to your model. And if you don’t have other sources of money beyond private dollars, you probably need to at least explore whether diversifying makes sense for your organization.
- Not Connecting It to Your Strategic Plan. Ok, I’m going to assume that your nonprofit has a strategic plan, even though many nonprofits don’t have one or they have a poor one. But once you have a strategic plan in place, you have to connect your money strategy to that plan. What good is it to have lofty program goals if you have no idea what those goals will cost (expenses) and how you will raise the money to make them a reality (revenue). You must have a multi-year financing plan that directly relates to your multi-year strategic plan.
- Ignoring Capital Goals. You can’t just raise revenue (the day-to-day money to keep the organization going), you also probably need capital (the money to build infrastructure, technology, systems) once in awhile. If you don’t include dollar goals for the amount of capacity capital your nonprofit needs, I doubt you will ever raise it. You cannot continue to operate with infrastructure, staffing, technology and systems that are inferior to your needs and goals. Determine how much capacity capital you need and include those goals in your financing plan.
- Not Giving Your Board a Role. You cannot leave the burden of raising money solely on the shoulders of your staff. One of the key responsibilities of a nonprofit board of directors is to ensure the financial viability of the organization they serve. So this means that the board as a whole and each individual board member must understand and play a role in the money strategy of the organization. So start by requiring each board member to give and/or get a certain amount (usually your major donor level) and then make sure your board “money committee” is active and engaged, and finally integrate money into every meeting and conversation your board has. Money MUST be top of mind for the entire board.
- Not Focusing On High Return Activities. Some fundraising plans include activities that a nonprofit has always done to bring money in the door without analyzing their effectiveness or expanding into new or more profitable activities. Start by analyzing the return of every money raising activity you engage in and then focus your money strategy on those that actually have a positive return.
I would love to see more nonprofits create a smart, long-term financing plan for their organizations. Because the reality is that those that do so will create more sustainable social change.
If you want to learn more about how to creating a financing plan for your nonprofit, sign up for our Creating a Financing Plan webinar.
And if you want to apply the other concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the 27-page Financing Not Fundraising e-book.
Photo Credit: Hiking Artist
Key to any smart nonprofit financing strategy is an analytical approach to focusing on your most profitable activities. Part of this requires calculating the cost of fundraising of every revenue-generating activity your organization engages in. But the more important, and difficult, part is deciding when to stop an activity that doesn’t make financial sense anymore, which is the topic of today’s installment of our regular Financing Not Fundraising blog series.
To recap, our Financing Not Fundraising blog series was born out of the reality that fundraising in the nonprofit sector is broken. Nonprofits have to break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities and instead work to create a broader approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.
In the world of fundraising, nonprofit leaders often make decisions based on what will ruffle the fewest feathers rather than what is financially best for the organization. For example, a nonprofit shouldn’t continue hosting their annual gala year after year simply because they always have, or because their board, donors or staff think it should continue, or because of some vague “goodwill” it creates.
Rather a nonprofit’s leaders should make a data-driven decision each and every year. When a fundraising activity starts to cost an organization more than it brings in, it’s time to abandon that activity. The same is true of a foundation grant that takes many more resources than it generates, a direct mail campaign that costs the organization more than it brings in, or any other revenue-generating event that is financially ineffective.
I know that the idea of abandoning what an organization has done in the past could cause tremendous political upheaval, so it is absolutely necessary that you follow a disciplined and defensible approach to uncovering and then abandoning costly activities. Because if you don’t, they will eventually bleed your nonprofit dry.
Here is the approach to take:
- Calculate. You need to know the net revenue and cost to raise a dollar of every revenue-generating activity your organization engages in. This includes each event, each direct mail and email campaign, the grants you write, your major donor campaign, and so on. Here’s how to do those calculations.
- Compare. Then compare the net revenue and cost to raise a dollar calculations of every one of your activities to see how they stack up against each other.
- Create 3 Lists. Assign each of your revenue-generating activities to one of three lists:
- Abandon: Activities with a cost to raise a dollar above $1.00 should be put here.
- Evaluate: Activities with a cost to raise a dollar just under $1.00 go here. You may want to investigate whether you can cut direct or indirect costs in order to lower the cost to raise a dollar.
- Invest: Activities with the lowest cost to raise a dollar are the most profitable to your nonprofit, so you should work to invest more time and resources in these activities.
- Gather Support. It’s not enough to have the executive director and/or development director on board with a decision to abandon an activity. You have to make the case to the entire staff and board, and possibly some invested donors (like event sponsors). Walk them through your net revenue and cost to raise a dollar calculations. Help them understand that this particular event, campaign, foundation proposal actually costs the organization money. Focus on how you could reallocate resources to more financially lucrative activities.
- Pull the Plug. Please, please, please don’t do the analysis, build your case and then get cold feet. It takes real courage to make hard decisions, especially in the face of opposition. But if you know you must end something then DO IT! Don’t let anyone talk you out of making a smart financial decision.
I would love to see more nonprofit leaders abandon financially draining activities. It is not easy, I know, but it is the only path toward financial sustainability.
If you want to learn more about how to do this analysis, view our Calculating the Cost of Fundraising webinar. And if you want to learn more about applying the other concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the 27-page Financing Not Fundraising e-book.
Photo Credit: Skley
In part 9 of our ongoing blog series, Financing Not Fundraising, we are discussing the importance of calculating the return on investment of every revenue-generating activity your nonprofit undertakes. This can be fairly easily understood through two basic, but critical analyses: net revenue raised and cost to raise a dollar. If these two calculations were applied to every money-making effort a nonprofit engages in, organizations could quickly determine which are the most effective activities and scarce resources could be more profitably allocated accordingly.
If you are new to this ongoing series, our Financing Not Fundraising series argues that fundraising holds the nonprofit sector back by keeping nonprofits in the starvation cycle of trying to do more and more with less and less. To overcome this, nonprofits have to break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities. Instead, they must create a broader approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.
There are two simple, and related, calculations necessary to determine the effectiveness of a nonprofit’s revenue-generating activities. The first is net revenue. NET revenue is so much more informative than GROSS revenue. Gross revenue is the total of all money brought in because of a fundraising activity (a direct mail appeal, a gala, a foundation grant, a major gifts campaign). But that figure is meaningless until you understand what it COST you to bring that money in the door. These costs are both DIRECT (the materials required for the activity, the staff that worked directly on the activity) and INDIRECT (volunteer hours, overhead staff time). You only really know how much money you made once you subtract the costs to make it. Thus,
Net Revenue = Gross Revenue – Fundraising Costs (Direct and Indirect)
Let me give you an example. Let’s pretend that a nonprofit organization with a $500,000 annual budget throws an annual gala with a band, catering, and an auction. One staff member spends half their time getting the event together, and a board committee helps sell tables and provides oversight. 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.
That’s only the gross revenue. What is the net revenue of this gala, i.e. what did it cost them to raise that money? The direct expenses for the event (the band, venue, food, decorations, invitations, etc.) cost them $50,000.
Direct Expenses = $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 attended meetings, made phone calls to invite people, and came to the event. The Development Director worked on the event. And the board committee put in many hours planning, marketing, and attending 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 = $27,000
So the total costs of the gala were:
$50,000 (direct expenses) + $27,000 (indirect expenses) = $77,000
And, the net revenue on this event was:
$100,000 (gross revenue) – $77,000 (direct and indirect costs) = $23,000
Which brings me to the second critical calculation: cost to raise a dollar. How much did it cost the organization to raise that $23,000?
Cost to Raise $1.00 = Costs (Direct and Indirect) / Net Revenue
$77,000 / $23,000 = $3.35
So it cost this organization $3.35 to raise $1.00. That’s not an attractive return is it?
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?
Well, let’s take another example. Pretend this organization hires a major gift officer at a salary of $65,000 per year plus benefits. Her salary and benefits are the direct costs. The indirect costs could include: the Executive Director’s and board members’ time to go on donor and prospect visits, creation of materials, and the sending of thank you letters. The total for these direct and indirect costs would be $100,000. Say that this major gift officer raises $500,000 per year in major gifts.So the net revenue would be:
$500,000 (gross revenue) – $100,000 (direct and indirect costs) = $400,000 Net Revenue
And the cost to raise a dollar would be:
$100,000 (direct and indirect costs) / $400,000 (net revenue) = $0.25
So it takes $0.25 to raise $1.00. That’s a dramatically better return on investment than the gala that cost $3.35 to raise $1.00 above, isn’t it?
I encourage you to run the numbers on your own fundraising activities and then compare. How does your net revenue and cost to raise a dollar compare across activities? Which are the most effective fundraising activities? What if you poured more effort and resources into the higher net activities? More money would contribute to your bottomline, meaning more money to spend on the social impact you want to create.
That could be transformative.
If you want to learn more about calculating the costs of fundraising, download our Financing Not Fundraising: Calculating the Costs of Fundraising webinar, or download the 27-page Financing Not Fundraising e-book.
Photo Credit: sykez
When I went to get my mail today, I was reminded how some nonprofit organizations simply refuse to change, despite how ineffective their status quo is. In today’s mail was one of four fundraising appeals per year that I receive from a national nonprofit. A nonprofit, I might add, that I haven’t given to in 11 years. I won’t mention the nonprofit’s name because they are a great organization doing important work. I don’t fault their mission or their execution, but I do take issue with their inability to effectively analyze their fundraising activities.
Nonprofits no longer have the luxury of doing what they have always done, simply because they have always done it. Now more than ever, nonprofits need to take a step back and determine when they should invest limited resources in an activity and when they should not.
I made a $50 donation to the local chapter of a national nonprofit when I lived in Washington DC in 1998. A few weeks after my initial donation I started receiving a new appeal from them every two weeks. I found it a bit annoying, but still believed in the organization. So the next year I made another donation. When the appeals continued to come several times a month, month after month, I became increasingly frustrated. I decided the following year that my money was better spent on an organization that used their resources more effectively. However, this nonprofit wasn’t willing to let me go.
For the next two years I continued to receive the same number of appeals, but they stepped up the barrage by including small gifts as an incentive for me to donate. They would sometimes include 4-color brochures about additional gifts I would receive if I gave at certain levels. Aside from the fact that “buying” my donation was completely distasteful to me, I was appalled that they were spending so much money trying to get a small donation from me.
Three years after my last donation to this nonprofit they slowed their appeals, but I was still receiving at least 4 letters per year. To this day, and after 3 moves and 2 new cities, that rate of appeals continues, often with expensive brochures and token gifts included. Today I received the second quarter appeal for 2011 from them. It is appalling to me that they have wasted so much time, energy and resources on me when I clearly demonstrated, 11 years ago, that I was no longer interested.
The sad part is not that they spent all of my donation and more on trying to get more money out of me, as opposed to working toward their mission or building their organization. The truly sad part is that I could have easily become a lifelong donor, perhaps even a major one. To this day I still believe in and admire the work they do. But the fact that they can’t figure out how to raise money effectively completely turns me off. And I don’t think they even realize what they are doing to their donor base. They have demonstrated no interest in getting to know me as a donor or recognizing when I clearly tell them how to treat me.
The nonprofits that are going to attract and retain donors who provide the long-term financial sustainability necessary for achieving real social impact are those that are:
- Constantly evaluating the ROI on their revenue-generating activities and abandoning low return activities
- Getting to know their donors and communicating and interacting with them in a way that meets the donors needs and interests
- Connecting their revenue-generating activities to their mission, not to gimmicks and gifts
- Expanding into new distribution channels (social media, e-marketing, friend-raisers) instead of relying on what they have always done to acquire donors
- Continually improving, constantly pushing themselves to get better, more effective and more efficient
I doubt that my nonprofit stalker has found long-term financial sustainability and really, it’s little wonder why.
Photo Credit: BJ Carter
Note: This post originally appeared on the Change.org Social Entrepreneurship blog last year.
There is an economic concept that is beautifully profound in its simplicity, but often overlooked in the nonprofit sector. Opportunity costs are the cost (financial, time, resource, other) of what you have given up in making a choice between two or more options. Understanding the opportunity costs of decisions is particularly important when resources are scarce, as is the case in the nonprofit sector.
Key to the concept of opportunity costs is that you are consciously analyzing two or more options and what you must give up in choosing one over the others. So, for example, a child who has to decide if they want a candy bar or an ice cream cone recognizes that in choosing the candy bar they are giving up the enjoyment of the ice cream cone. It seems so simple, yet in the nonprofit world it becomes much more complex.
Because the nonprofit sector is undercapitalized, money is king. A driving motivation in many nonprofit organizations is to preserve money, or go after money, at all costs. So the idea of opportunity costs is often thrown out the window.
Say, for example, that a nonprofit leader is deciding whether to spend $45,000 to hire a grant writer or $75,000 to hire a Development Director. The tendency would be to hire the grantwriter because they are cheaper, because in the world of nonprofits, cheaper is always better.
But let’s look at the opportunity costs. In hiring a grantwriter, the nonprofit would save $30,000, but lose many times that amount in opportunity costs. If they had hired a skilled Development Director with experience raising money from sources beyond foundations (individuals, corporations, earned income), the difference in revenue brought in under the grantwriter versus under the Development Director could be in the hundreds of thousands. In choosing the “cheaper” grantwriter, the nonprofit is actually costing the organization a huge amount–the opportunity cost.
Nonprofits are sometimes so strapped for money that they head out the door with a fundraising ask trying to get the quickest money, instead of the most money. Take Idealist’s campaign earlier this year to raise emergency funds for the nonprofit job board. They raised some good money, but what if they had waited to launch a fundraising campaign until after they put a new business plan together? With a solid, innovative plan in hand for completely revamping a struggling organization, they probably could have raised 10 times the amount they did raise. So for them the opportunity costs of not waiting to go public with an ask was potentially huge.
But the calculation of opportunity costs goes well beyond money. The value of a board member’s time in a nonprofit is huge. A good board member has the potential to forge relationships with funders, partners, governing entities and others that could grow or strengthen the work of the nonprofit. But often a board member’s time is instead used to organize fundraising events, sit in endless meetings, review mindless policies. If a nonprofit were to calculate the opportunity cost of choosing to have a board member pick out tablecloth colors for the next event (trust me, it happens) versus having them use that time to introduce the Executive Director to a new potential donor, the costs would be eye-opening. A board member’s time, just like the money flowing to the organization, is not limitless.
Nonprofits cannot ignore opportunity costs, as if they don’t apply in their resource-strapped world. Indeed, because nonprofits are so constrained for resources (money, time, staff, volunteers) they should be even more cognizant of opportunity costs and ensure that every last resource is put to its highest and best use.
Photo Credit: Freddy The Boy
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