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.

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

Changing Nonprofit Finance: The Other Side of the Story

Continuing my argument from previous posts here and here about how nonprofit finance must change, today I want to focus on the other side of the story: how nonprofit organizations themselves can be smarter about funding.  I want to explore a couple of ways that nonprofits are inefficient in generating revenue.

First, foundation funding.  The Foundation Center has been compiling a detailed list of various foundations’ responses to the economic downturn.  This is interesting and helpful to a point.  But the vast majority of nonprofit organizations probably will never receive a grant from any of these foundations anyway.  In fact, according to Giving USA’s annual survey of nonprofit charitable contributions, foundation funding made up only about 12% of the $306 billion that nonprofits received in charitable contributions in 2007.  And if you look at the overall sources of revenue for the nonprofit sector, earned income and government funding make up a much larger piece of the overall revenue picture than charitable contributions.

Foundation funding is a small piece of the entire nonprofit revenue landscape.  So I’m not sure why some nonprofit organizations spend so much time and money hiring grantwriters, going after long-shot grants and worrying about the state of the foundation community.  Nonprofits would be better served to take a more holistic view of their revenue engine and opportunities for growth.  Is earned income a possibility?  Can they tap into more individual giving, which makes up 82% of the charitable giving pie?  Instead of hiring a grantwriter, how about hiring a seasoned revenue generator who has experience and results in all aspects of revenue creation, who could take a look at the assets (relationships, donor base, mission, services, etc.) a nonprofit has and how they could be translated into a more diversified and sustainable funding mix.  Such a person would cost more than a grantwriter, but the return on the investment would be far superior.

Which brings me to one of the favorite and lowest ROI fundraising activities in the sector:  events.  Galas, fun runs, parties seem to be a staple of the nonprofit sector, but are they really generating much net revenue?  Indeed, the net revenue of nonprofit events is often not calculated.  That is to say, when you factor in the direct (food, band, decorations) and indirect (staff time, value of board/other volunteer time, etc.) costs of the event, what is the true profit?  I think most nonprofit fundraisers would be surprised.  And there are two other drawbacks to events.  First, there is an increasingly competitive landscape for events.  Each weekend in my city there are several nonprofit fundraisers.  How many invitations must philanthropists get per month?  Surely they are exhausted by it.

But secondly, and even more disturbing, is that events move a nonprofit away from their core mission, their reason for being and thus their reason for raising funds. Instead, the nonprofit asks their donors to focus on the party and what’s in it for the attendees.  Through a gala, a nonprofit teaches its donors not about the important change the organization is creating, but rather that the organization exists to provide them a good time.

In order to transform how nonprofits are financed and thus to increase our effectiveness and productivity at solving problems, two things have to change.  First, the legal and financial structures that hold nonprofits back from innovating, growing and becoming sustainable must change.  And second, nonprofits themselves have to be smarter about using the tools they do have more effectively.  They must calculate the return on investment of the revenue generating activities they undertake and discard those that are no longer productive.

Tags: earned income, events, Fundraising, gala, Giving USA, grantwriter, nonprofit, return on investment