cost of fundraising
Predictably, my post last week arguing that nonprofit events aren’t efficient fundraisers caused some controversy. In particular, fundraising consultant, Gayle Gifford and I had an interesting (and very polite) debate about the post.
The exchange with Gayle really made me think and further refine my argument (which is really the point of debate, right?). What our exchange made me realize is that my issue with nonprofit fundraising events goes far beyond my belief that they are inefficient fundraisers.
Rather, my distaste for events stems from the fact that they often perpetuate the charity mindset, a destructive approach that keeps the work of social change sidelined and impoverished. The world is changing rapidly and the “charity” model doesn’t work anymore. And in fact, that model holds nonprofits back from becoming more efficient, more sustainable social change machines.
In our debate, Gayle and I discussed how events are merely a symptom of larger changes happening in the economy. As I wrote, nonprofit events are part of a:
“dying mentality that “charity” lives beside,…instead of fully integrated into, the economy. I believe that we are moving to a place where the work of social change (historically the work of “charity”) is fully integrated into the rest of the economy…the work of social change is just as important as the work of making widgets or the work of building roads and everyone understands that in order for all of it to work well, we need to finance it effectively.”
And Gayle argued that what I am describing would be a significant change to the world as we know it:
“I too long for/ and am working for the day when social justice is integrated into our economy as well as our philanthropic life… though that’s going to take some pretty massive restructuring of an economy based on unlimited resource extraction and consumption. But I still hold out that hope.”
But, as I responded, I think that kind of massive restructuring is already well underway:
I agree with you that fully integrating social change into our economy is not going to be quick or easy, but the truth is that it is already happening. There is a real convergence of the nonprofit, for-profit and government sectors and the result is that social change is now rather ubiquitous. At the same time, technology and the ways in which we communicate are changing rapidly as well. Add to that a Millennial generation that bakes social change into everything they do, and I think you start to see the beginnings of the “pretty massive restructuring” you and I are talking about. Nonprofits need to do the analysis and abandon activities that just aren’t effective. And then they need to look to some of these structural changes we are witnessing to find more efficient ways to create a sustainable financial model for their social change work.
In my mind, nonprofit fundraising events are anathema because they are symptom of a larger, ineffective way of thinking about nonprofits and the work of social change. Fundraising events are typically run as an aside, a tangential activity that sucks time and money out of a nonprofit and begs otherwise uninterested participants to pay the price of admission. These events keep charity squarely separate from the “real” work of the world.
And I truly believe we have moved past that. There are just too many social challenges to think that benevolent, reciprocity-based “charity” will work anymore. Social change must be bigger, more effective, and more efficiently financed.
When we stop thinking of the work of social change as “charity” supported in part by inefficient, occasional parties, we start creating real investment, real attention, and real change.
Photo Credit: Gerald Ford Library
I was speaking to a group of nonprofit leaders recently about how to Move from Fundraising to Financing, and when I came to the part about events, the room went predictably quiet. Looks of shock shot around the room. Events are so ubiquitous in the nonprofit sector, how could I possibly say they have little financial value? It was heresy.
For the most part, when you factor in the direct (food, venue, invites, entertainment) and indirect (staff, board and volunteer time) costs of an event, you either break even (best case) or lose money (worst case). The error many nonprofit leaders (board and staff alike) make is looking only at the gross revenue of an event (“We made $50,000!”) as opposed to the net revenue (“After factoring in expenses, we actually only made $20,000 on that event…”) and the cost to raise a dollar (“Whoa, it cost us $1.50 to raise $1.00 at that event!”).
Because it was a group of nonprofit leaders, they remained polite despite their disbelief (God love them!). But they did argue with me, and here is how I responded to each of their refutations:
“Board and staff time aren’t event expenses.”
The argument is that since staff salaries are a fixed expense and board (and other volunteer) time costs nothing, you shouldn’t include these items as event expenses. But you absolutely should. Every resource a nonprofit has (especially board and staff time) is limited. When you ask a board member to spend 20 hours volunteering to put on and attend an event, that is 20 hours of their time you can’t use in other (more profitable) ways. This is the idea of opportunity costs. As a nonprofit leader you want to make sure you are putting each resource to its highest and best use.
“Even if an event isn’t financially profitable, it raises awareness.”
I know I’m on a “raising awareness” rampage lately, but an expensive and time consuming activity like an event should never have such a vague goal guiding it. Awareness is not a real, tangible financial result. Awareness does not equal action, and it certainly doesn’t equal money. An event attendee’s vague sense of having had a good time quickly dissipates. Instead of trying to raise awareness, create a real strategy for getting in front of and encouraging action from your target funders.
“But our event builds our brand.”
Building your brand is about as meaningless as raising awareness. Forget the marketing jargon, the word “brand” is just a fancy word for what people think of your organization. I know this is blasphemy, but it simply doesn’t matter what people who are not in your target audience(s) think about your organization. In reality you only want to “build your brand” among those you are specifically targeting. So segment the market, figure out your target audiences, and then find cheaper, more specific ways to get them to act.
“We use events to connect with major donors”
Yes, now you are on to something. Let me be clear, I’m not saying that you should never host events. To the contrary, there absolutely are times when events make sense. When events are mission-focused, free to attend, and focused on cultivating and/or stewarding current or potential major donors (individuals, foundations, corporate leaders) they can make a lot of sense. But ONLY if you follow up with attendees on a one-on-one basis to further invest them in the organization and eventually ask them to contribute or renew their contributions. And ONLY if you don’t charge them to attend so that you can ask them for a bigger, and more meaningful gift down the road.
I stand by my claim: nonprofit events are not efficient fundraisers. Do the math on your events and see if they generate a positive cost to raise a dollar. If not, you should restructure or abandon them. But don’t continue doing something you hope is making money when it isn’t.
Photo Credit: Graham-Killers
I’ve been thinking about using Slideshare, the social media network for presentations and infographics, a lot lately. It’s an amazing site with tremendous content. I wanted to start sharing some of my presentations there.
So today, here is my first SlideShare offering, “Calculating the Cost of Fundraising.” These slides are excerpted from my Calculating the Cost of Fundraising on-demand webinar.
The concept is simple. If you want your nonprofit to achieve financial sustainability you need to analyze the return on investment of your money raising activities. With that analysis you can make smarter decisions about where you should focus your limited resources for greater financial success.
These slides and the more detailed webinar give you some quick and easy tools to use to determine the return on investment of all of your fundraising activities. The webinar then helps you compare the results of your calculations and gives you tips for deciding what to do with that information. And most importantly how to convince others on your board and staff when you have to move away from some money-losing activities (always a tricky political maneuver).
After 3+ years of a difficult recession it looks like the economy might be starting to turn around. That’s great news. But for the nonprofit sector, which is always the first hit by and last to rebound from a recession, it might still be awhile until they enjoy the looming economic recovery. But it does no good for nonprofit leaders to throw up their hands and curse the economy. Instead, nonprofits should seize this opportunity to rethink how their organization brings money in the door.
There are some key things nonprofit leaders can do to create a sustainable financial model in the midst of lingering economic uncertainty:
- Take a Step Back. Stop putting your organization in the “fundraising” box and take a big step back. Figure out an overall financial model for your organization that connects with your mission and your organization’s core competencies. Don’t just go through the regular fundraising motions (direct mail, events, grants). Rather, analyze how to create a long-term financial model for your organization.
- Harness Your Board. Your board of directors ideally is a group of people who bring connections and expertise that could help your organization. Tap into that. Educate them on what your organization needs and brainstorm how they can help. Now is not the time to be shy. Be strategic about what your board can do and get them to do it.
- Create a Plan. If your organization doesn’t have a strategic plan and a revenue plan, create them. You raise money by being strategic, first about what your organization is and does, and second about how you are going to create sustainable revenue streams. People give to causes that they care about, and they give even more money to organizations that are strategic about what they do and how. A good strategic plan is an invaluable tool around which you can build investment. And a good revenue plan gives you a step-by-step way to generate money.
- Reallocate Resources. As a nonprofit organization you have limited resources (money, staff, technology, time) with which to raise money. You want to make sure that the effort you put in has the highest return on investment. Calculate the direct and indirect costs of every revenue-generating activity and determine the real net income you generated. Are there better, more effective ways to raise more money for less cost and effort?
- Use Technology. Move your communications with donors and prospects online. You’ll save money and have a better chance of getting more and bigger gifts. Send email newsletters, campaigns, event invites. Survey your donors. Create an online community through social media where people can get to know your organization and become involved. People will become more interested in your work and more invested in the organization.
- Learn from the Best. Now is the time to learn from others, get a fresh perspective, find a mentor or coach for your Development Director. Use social media to find interesting and innovative people and ideas. Talk with your fellow social change leaders locally, nationally and internationally. Attend online conferences and webinars. By getting out and hearing what others have done and how they have innovated you will find new ways to grow revenue.
- Strengthen Your Case. Money is raised around a case for support. It can be tempting when times are tough to fall back on a message of need. “We need to raise $50,000.” But the better way is to clearly connect donors with the change you are creating in the community. If you don’t have a case for support write one. If you have one, revisit it and make sure that it is compelling, clear, concise, inspiring. Invest donors in the change you are creating.
- Clone Your Best Donors. When you are struggling to find new donors, go back to the source. Dig into your database to determine the characteristics (demographics and psychographics) of your best (most years of giving, biggest dollar, greatest upgrade) donors. Then survey them (formally or informally) to find out why they give, what messages resonate with them, what they read, where they get their information. You want to understand how they tick so that you can find others like them.
- Diversify Your Funds. When one revenue stream (or several) are down, you want to be able to draw on other streams. Are there other revenue streams you could launch or strengthen? Have you explored earned income? Could you grow your individual donor base? There are many ways to raise money and always potential for new avenues. Explore whether some of these make sense for your organization.
Things may be looking up, but it’s going to be awhile for the nonprofit sector. Instead of waiting around for a better economy, make some significant changes now to how you raise money. In so doing you’ll be turning this challenge into a tremendous opportunity for your organization.
Note: This post is the first in the ongoing blog series, Financing Not Fundraising. For more on the Financing Not Fundraising approach, view the Financing Not Fundraising book series and the Financing Not Fundraising webinar series.
I’d like to outline a new vision for how the nonprofit sector gets funded. Fundraising in its current form just doesn’t work anymore. In fact, traditional fundraising is holding the sector back by keeping nonprofits in the starvation cycle of trying to do more and more with less and less.
Really, what nonprofits need is a financing strategy, not a fundraising strategy. By that I mean that 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, nonprofits must work to create a broader approach to securing the overall FINANCING necessary to create social change.
What does this new approach to financing the nonprofit sector look like? It looks like this:
- Nonprofits understand that funding programs and general operating expenses is not enough to survive and thrive. All activities that bring money in the door (individual donors, foundation grants, earned income, government contracts, loans etc) are integrated and part of a larger financing strategy that supports the short AND long term goals, as well as the programs AND infrastructure of the organization.
- Nonprofits no longer segregate fundraising from their other activities (programming, administration). All elements of a nonprofit’s operations, including the money-making ones, are fully integrated and moving forward together.
- Individuals, who make up 80%+ of the private money entering the sector, become a greater focus of fundraising efforts, rather than corporate or foundation philanthropy (which make up 5% and 12%, respectively, of the private money entering the sector).
- Fundraising messaging moves from an emphasis on the tin-cup mentality and donor benefit, to an emphasis on the social impact a nonprofit is creating.
- Money is raised to support not only the direct services that a nonprofit provides, but also the infrastructure (staff, technology, systems, evaluation, training) of the organization. Nonprofits understand that they will only get better at delivering impact if they have an effective organization behind their work.
- Other types of capital vehicles (like loans, equity) are added into a nonprofit’s financing mix.
- Earned-income opportunities are evaluated and, if appropriate, launched. Earned income is not right for every nonprofit, but it is worth exploring and analyzing opportunities as they come and understanding and being open to the revenue-generation possibilities.
- The net revenue of every money-making activity a nonprofit engages in (events, individual fundraising appeals, corporate sponsorships, earned income, etc.) is calculated and evaluated. Low net revenue activities are replaced with higher net endeavors.
- Nonprofits move away from “push” fundraising and marketing efforts that force their message on innocent bystanders (like direct mail appeals) and towards “pull” fundraising and marketing efforts that bring interested donors/prospects to the organization (like blogs, Twitter, Facebook, friend-raising events, etc.)
There really is a better way. Nonprofits don’t have to wear out their fundraisers, their donors, their staff and their message. By working towards financing their efforts as opposed to fundraising for them, they can get a lot closer to social impact.
If you want to learn more about applying the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the Financing Not Fundraising book series.
Photo Credit: Wikimedia
There’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?
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.