Financing Not Fundraising: Calculating the Cost of Fundraising

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 how to apply the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series.

To download the 27-page Financing Not Fundraising e-book, click here.

Photo Credit: sykez

Tags: calculating the cost of fundraising, cost to raise a dollar, financing not fundraising, fundraising costs, fundraising planning, fundraising strategy, net revenue of nonprofit fundraising, nonprofit events, nonprofit galas, return on investment of fundraising

Calculating the Cost of Fundraising

It seems that almost every nonprofit I talk to either has or would like to have some sort of fundraising event.  There is 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 for the sector.

At the risk of boring you with the math, 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, 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 them $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?

These two simple calculations, net revenue and cost to raise a dollar, could transform nonprofit fundraising efforts.  If nonprofit organizations 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 running 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 more about more effective ways to raise money for your nonprofit, check out our Financing Not Fundraising blog series or our Financing Not Fundraising webinar.

Tags: cost to raise a dollar, events, Fundraising, gala, net revenue, nonprofit