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
There is an analysis I wish every nonprofit leader would do which could transform how the sector is financed. If more nonprofit leaders took a step back and calculated the cost of fundraising, in all the various ways that they raise money, they could focus their efforts on the most effective activities. And stop pursuing things that exhaust their board and staff.
If nonprofit leaders understood the net revenue and cost to raise a dollar of every fundraising activity they engage in they could answer questions like:
- How much does that gala really get us?
- How effective is our direct mail campaign?
- How does it compare with our email campaign?
- Would it make sense to cancel our annual event and hire a major donor fundraiser instead?
- Should we keep writing that government grant?
The Social Velocity on demand webinar “Financing Not Fundraising: Calculating the Cost of Fundraising” will help you answer these (and more) questions.
I asked for audience participation prior to the webinars. When people registered for this webinar, I asked them to submit some numbers from one of their past fundraising activities (an event, a direct mail piece, a foundation grant) so that I could calculate the fundraising costs of a couple of participants during the webinar.
Financing Not Fundraising: Calculating the Cost of Fundraising Webinar
This webinar will help you:
- Calculate the return on investment of all your revenue-generating activities
- Give you the net revenue raised and cost to raise a dollar formulas you need
- Analyze which are effective fundraising activities and which are not
- Articulate to board and staff why this analysis is important
- Provide case studies of other nonprofit ROI calculations
- Give you a process for analyzing and making decisions about all of your fundraising activities
- Help you deal with the politics of abandoning poor performing activities
All webinar registrants receive:
- A link to a recording of the webinar, which you can watch as many times as you like
- The PowerPoint slides from the webinar
- The ability to ask additional follow-up questions after the webinar
Photo Credit: loco’s photos
In our ongoing series “Financing Not Fundraising,” we are exploring the argument that nonprofits need to stop fundraising and start financing social impact. The idea is 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, they must work to create a broader approach to securing the overall FINANCING necessary to create social change.
The next piece of the puzzle is to create alignment in your nonprofit organization between mission (your reason for existing), core competencies (what you do better than anyone else in the world), and money (how you sustain yourself financially).
An organization in alignment looks like this:
The mission is supported by the organization’s core competencies which both feed into how it brings money in the door.
When one or two of these three elements are out of alignment, chaos can ensue. For example:
Mission is misaligned: An organization that can generate money and operates great programs, but can’t bring it all together in a coherent single purpose, this is otherwise known as “mission creep.”
Core competencies are misaligned: An organization that has a great, clear idea of what they do (mission) and can raise money around it, but can’t deliver. This is reminiscent of the dot com era when there were countless businesses with fabulous ideas that successfully raised VC or angel money, but didn’t really have a core competency or product to deliver and eventually went bust.
Resource engine is misaligned: This final misalignment is the one nonprofits are most familiar with. An organization has a great mission and can produce great results, but they can’t find a way to make the organization financially sustainable.
And it is this money misalignment where Financing Not Fundraising comes into play. Traditional nonprofit fundraising is often an example of money misalignment. It looks like this:
- The development staff (money) and program staff (mission) sit in separate parts of the building, rarely ever talk to each other, and make their respective decisions without consulting the other
- The board and non-fundraising staff disdain money and refuse to participate in bringing it in the door
- A nonprofit creates fundraising events that have nothing, or very little, to do with the mission of the organization
- A nonprofit raises money around gimmicks and donor benefits instead of around the mission and impact of the organization
- The organization’s strategic plan only contains goals for program delivery (mission), not how to finance that delivery (money)
And that’s just a beginning list. Shoving money to the side and ignoring it is the equivalent of a business owner saying they don’t need to pay attention to sales. “Nonprofit” means that individuals (private owners or shareholders) don’t gain financial benefit, it doesn’t mean that the entity doesn’t make money.
To get money back in alignment with mission and competencies nonprofits need to do several things:
- Embrace the idea that money is not a necessary evil to your organization, but rather an equal and supportive partner to your mission
- Train your entire board and staff on money in the nonprofit sector in general, and how money comes in the door at your specific organization
- Make sure that your strategic plan has a realistic and thoughtful financial plan attached to it
- Move fundraising activities and special events away from convoluted ways to extract money from people and towards celebrating and educating the community about the impact you are achieving
- Be up front with board members, donors and staff about how much it costs to fund every aspect of the organization’s operations and the various ways that money offsets those costs
Instead of sequestering fundraising away from the “true work” of the organization, nonprofits must fully integrate financing into their mission. It’s the only real way to create 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 27-page Financing Not Fundraising e-book.
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