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
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.