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

7 Things Board Members Can Do To Raise More Money

I am often asked by exhausted board members and executive directors what the board can do to raise more money. My answer, let me tell you right away, is NEVER to launch a new event.  Don’t get me started on my anti-events rant, that’s another post.

But there are other things that board members can do to raise significantly more money for their organization, in a much more effective way.  Here are 7 to get you started:

1. Invest. Make a significant financial investment in the organization.  This is so obvious, yet rarely does a nonprofit organization enjoy 100% giving from their board.  And those that do, often have several board members who are only making “token” gifts.  If the nonprofit on whose board you serve isn’t on the list of your top 3 nonprofits and you aren’t allocating your philanthropic dollars accordingly, then get off the board.

 

2. Open Doors. Open up your network to the organization. We all have friends, colleagues, co-workers, family members, neighbors.  They may not all be $10,000+ level givers, but you would be surprised at the capacity that probably does exist there.  If you really believe in the organization, then spread the word about your involvement to your network and encourage them to become involved.  If you’re uncomfortable doing this then perhaps you need to rethink how committed you are to the organization.

 

3. Get Strategic. Demand that your nonprofit create a strategic plan. Without an articulated direction and a strategy for getting there how are you going to get donors to invest? So many nonprofit organizations operate without a plan, and that’s probably why they struggle to raise funds. People donate to a cause, but they invest in a executable strategy for impact.  The former results in small gifts, the latter brings big dollars.

 

4. Expand the Revenue Model. Often nonprofit organizations take a narrow approach to thinking about bringing money in the door.  They may have a direct mail campaign, get some government and foundation grants and call it a day. Instead, take a bigger picture view of the business that you are in and the various ways you could finance, not fundraise for, the end goal. Executive and development directors are often so caught up in the day-to-day of funding operations that they don’t have the luxury of taking this big picture view, but that’s where the board can step in.

 

5. Fund Revenue-Generating Capacity. Make sure the organization invests in sufficient development capacity. Budget for and find a top-notch development director. Secure outside expertise to create a solid, executable development plan. Train the board on their role in fundraising. Don’t ask the organization to cut corners on development expenses, because you will just pay the price later.

 

6. Articulate Why Someone Should Give. It’s so obvious to you why you are involved in your nonprofit. But can you articulate that to others in a compelling way? Can you demonstrate how a significant community problem is being solved by your organization? Can you do it in 2 minutes? Can the other board members and the staff do it? If not, then you need to create a case for support.

 

7. Get the Board on Board. Once you’ve done all of these things, get your fellow board members on the boat. The nonprofit sector is structured to be led by consensus. So it isn’t enough for you as a sole board member to “see the light.”  You have a responsibility to convince your fellow board members that they can’t think small anymore. They have to invest, get strategic, open doors, and so on.  Once you are all on the same page, you will be a force to be reckoned with.

If you are interested in learning more about how to get your board raising money for your nonprofit, check out our Getting Your Board to Fundraise recorded webinar.

I promise you, there is an answer. It doesn’t have to be so hard. Board members can help their struggling nonprofits to find a path toward financial sustainability.

Tags: Board of Directors, case for support, development director, nonprofit, nonprofit events, raise more money