return on investment
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
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.
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