- WHAT IS FINANCING NOT FUNDRAISING?
- STOP FEARING MONEY
- CONNECT MONEY TO YOUR STRATEGIC PLAN
- FIX YOUR FUNDRAISING PLAN
- JUMP START YOUR BOARD
- ALIGN DEVELOPMENT AND EXECUTIVE DIRECTORS
- GET REAL WITH YOUR DONORS
- ABANDON INEFFECTIVE FUNDRAISERS
- KISS THAT ENDOWMENT DREAM GOODBYE
- REINVENT THE CAPITAL CAMPAIGN
- GETTING STARTED
What is Financing Not Fundraising?
This e-book is the second volume in the Financing Not Fundraising e-book series. While the first e-book laid out the basic elements of the Financing Not Fundraising approach, this e-book goes deeper into the concept.
If we have learned anything from recent economic difficulties, it is that we are undergoing an economic restructuring. Business as usual just doesn’t work anymore.
And this applies to the nonprofit sector as well. Fundraising in its current form just doesn’t work anymore. Indeed, traditional fundraising is holding the sector back by keeping nonprofits in the starvation cycle of trying to do more and more with less and less. Really, what the sector needs is a financing strategy not a fundraising strategy. Nonprofits must break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities. Instead, nonprofits must work to create a broader approach to securing the overall FINANCING necessary to create social change.
Nonprofits must take a big step back and create a financial model for their particular organization that is strategic and integrates well with their core competencies and their mission.
This e-book, the second in the Financing Not Fundraising series, expands on the basic elements of the Financing Not Fundraising model and helps those nonprofits that are ready to start moving away from fundraising to really dive into this new approach.
Here are the elements in this second level of Financing Not Fundraising:
- Stop Fearing Money
- Connect Money to Your Strategic Plan
- Fix Your Fundraising Plan
- Jump Start Your Board
- Align Executive and Development Directors
- Get Real With Your Donors
- Abandon Ineffective Fundraisers
- Kiss That Endowment Dream Goodbye
- Reinvent the Capital Campaign So let’s get started.
Stop Fearing Money
I love the moment, in working with a nonprofit, when the light bulb goes on. I look around the room and see people suddenly become energized when they realize that instead of fearing money as they have always done, they can employ it to create more social change.
Like it or not, money is an incredible tool. If nonprofit leaders could better understand, stop fearing, and learn how to wield money effectively, the results could be transformative.
Here’s what it means for a nonprofit to wield the money tool:
- Add Money to Every Conversation
When you have a board meeting to discuss a new potential activity, make sure someone is asking the question “What are the financial implications of this decision?” And when you are developing a new strategic plan, make sure you spend as much time on program goals as you do on financial goals. Money should never be far from your thoughts because there is no mission without money.
- Create a Financing Strategy
To effectively use a tool you must have a strategy behind it. You cannot just hope that the right amount and kind of money will magically appear at your doorstep. Instead, you must develop a financing strategy that answers the question “How will we raise the money we need to achieve our goals?” A strong financial plan demonstrates how much money you need, over what time frame, how it will come in the door, and what activities are required to make it happen. A comprehensive financing plan creates long-term sustainability for your organization, which means you are more likely to create social change.
- Make Every Board Member Contribute Financially
You simply will not have every board member thinking about money if they don’t each have a role in the financial engine of the organization. I am a firm believer in a mandatory give/get requirement for every board member. But let me be clear, I am not suggesting that every board member must write a big check, or even have friends who can write a big check. Rather, there are countless ways for board members to contribute to the financial bottom line of their nonprofit, which I’ll talk about later. Make sure that every single one of them does.
- Ask For Investments, Not Donations
If you are begging for money you aren’t using money as a tool. Money is what makes your theory of change a reality. So don’t put out the tin cup, rather create a message of impact that describes how your organization takes community resources and transforms them into better lives and better communities. Your organization is about solving problems. Articulate that and find partners who want to invest in that social change work.
- Raise Capital, Not Just Revenue
A critical, but rarely employed, use of money is to build a nonprofit organization. A nonprofit can no longer scrape by with inadequate technology, staff, materials, and systems. You must create a strong, sustainable organization around your mission. And you need capital (money for technology, revenue-generating staff, systems, etc.) to do that. Instead of piecing your infrastructure together day after day, launch a capacity capital campaign (which I’ll talk about in the “Reinventing the Capital Campaign” section below) to raise the money you really need.
Money doesn’t have to be a feared, uncomfortable element in a nonprofit. It can be an incredibly powerful tool for creating social change. Indeed, the only way for a nonprofit to really succeed is to embrace all that money has to offer.
Connect Money to Your Strategic Plan
If fundraising is the biggest challenge of the nonprofit sector, then strategic planning is only second to it. But the crazy thing is, if you connect the two (strategic planning and raising money) you not only will be more financially sustainable, but you will also achieve more social change.
Money and strategy should never be separated. So that means nonprofits can no longer operate with a strategic plan that ignores money. Instead, nonprofits must create a strategic plan with a fully integrated financing plan.
To connect strategy and money, you have to start from, or work toward, a place where three key things are fully integrated and working together in your nonprofit:
- Your mission
- Your core competencies and
- Your resource engine (money)
So that your nonprofit in alignment looks like this:
Alignment means that the ways in which you bring money in the door work with, not against, how you achieve your mission.
So what does it look like when you have connected money to your strategic plan? Your strategic plan:
- Articulates a Value Proposition
The goals, both programmatic and financial, of your strategic plan will not come to fruition if they are not created with an understanding of how your nonprofit fits into the external community marketplace. Before you create the goals of your strategic plan, you must do your research to understand the external environment of client needs, competitors/collaborators, funding sources, and other inputs that go into your work. This means that in order for your strategic plan to be realistic, and fundable, it must define a place in the external environment where your organization can add value.
- Includes a Money Goal
It seems so obvious, but so few nonprofits include a money goal in their strategic plan. At least one of the broad goals of your strategic plan has to be about money. I have seen a countless number of nonprofit strategic plans that tout lofty program goals but spend no time on how much those goals will cost and where that money will come from. Your strategic plan will remain only a paper plan until you include a goal about how you will bring enough money in the door to fund the plan.
- Projects Future Money
And just like your overall strategic plan, the money side of that plan must take a long-term view. You want to project future revenue and expenses for the entire life of your strategic plan. So if you are creating a 3-year strategic plan, you need to project the revenue and expenses required for the entire organization over those three years. And that revenue and expense must be based on what you say you will do in the three years of your strategic plan.
- Creates a Financial Model That Makes Sense
It makes me crazy when I see a nonprofit copying another nonprofit’s money raising ideas, like when a local nonprofit holds an event that appears to be very successful, so three other nonprofits try to mimic it. Or a new nonprofit launches a direct mail appeal because they think that’s what nonprofits do to raise money. The right way for your nonprofit to bring money in the door depends on your organization’s mission and core competencies (remember alignment above).
Create a smart financial model that adds to, not detracts from, your mission and that builds on the specific strengths of your staff, board and operations.
Nonprofits simply can no longer create a strategic plan that ignores money. To chart a compelling, realistic strategic direction for your organization you must learn how to connect money to your strategy.
Fix Your Fundraising Plan
I can’t tell you how often I hear nonprofit leaders complain about how difficult it is to raise money, how tired they are of banging their head against the wall, how difficult this economy is.
Well, there really is a better way. And it starts with a really good money plan for your organization.
But again and again I see the same mistakes being made in nonprofit fundraising plans.
Truly, nonprofits should have a financing plan, not a fundraising plan, and it’s not just semantics that differentiates the two. A fundraising plan is limited in time and ambition and results in ineffective, exhausting efforts to bring small amounts of money in the door.
A financing plan fully connects your mission to a long-term, sustainable funding strategy to bring that mission to fruition. A financing plan is smart, thoughtful and energizing.
Here’s where most nonprofits go wrong in their fundraising plans:
- Not Having A Plan At All
It boggles my mind how many nonprofit organizations expect that money will magically appear at their doorstep. It takes an overall money strategy, what I call a Financing Plan, to effectively marshal your resources (staff, board, other volunteers, technology, materials) so that enough, and the right kind of, money comes in the door to achieve your goals.
- Creating Just A One Year Plan
You cannot expect to create a financially sustainable organization if you are only planning for money one year at a time. Your financing plan should project at least 3-years into the future in order to ensure that you have sound financial footing from which to operate. A true financial strategy takes a long view and plans accordingly.
- Including Only Private Dollars
Your money strategy must include ALL sources of money flowing to your organization, making it a Financing Plan. You cannot just plan for individual, corporate and foundation dollars, you also must plan for how government and earned income sources will flow, if they are appropriate to your model. And if you don’t have other sources of money beyond private dollars, you probably need to at least explore whether diversifying revenue makes sense for your organization.
- Not Connecting It to Your Strategic Plan
As I discussed in the section above, you have to connect your money strategy to your strategic plan. What good is it to have lofty program goals if you have no idea what those goals will cost (expenses) and how you will raise the money to make them a reality (revenue)? You must have a multi-year financing plan that directly relates to your multi-year strategic plan.
- Ignoring Capital Goals
In addition to raising revenue (the day-to-day money to keep the organization going), you probably also need to raise capital (the money to build infrastructure, technology, systems) once in awhile. If you don’t include dollar goals for the amount of capacity capital your nonprofit needs, I doubt you will ever raise it. You cannot continue to operate with infrastructure, staffing, technology and systems that are inferior to your needs and goals. Determine how much capacity capital you need and include those goals in your financing plan.
- Not Giving Your Board a Role
You cannot leave the burden of raising money solely on the shoulders of your staff. One of the key responsibilities of a nonprofit board of directors is to ensure the financial viability of the organization they serve. So this means that the board as a whole and each individual board member must understand and play a role in the money strategy of the organization. Money MUST be top of mind for the entire board, which I’ll discuss in more detail in the next chapter.
- Not Focusing On High Return Activities
Some fundraising plans include activities that a nonprofit has always done to bring money in the door without analyzing their effectiveness or expanding into new or more profitable activities. Start by analyzing the return of every money-raising activity you engage in and then focus your money strategy on those that actually have a positive return. I’ll show you how to do this later.
I would love to see more nonprofits create a smart, long-term financing plan for their organizations. Because the reality is that those that do so will create more sustainable social change.
Jump Start Your Board
The words “fundraising” and “board” can sometimes seem so incongruous that they cause serious eye-rolling by the executive director. As a general (and probably euphemistic) rule, nonprofit boards of directors are not very helpful at bringing money in the door. But I believe it is up to the executive director to get tough and strategic about getting her board to take action.
Here is how to jump start your board and get them bringing more money in the door:
- Make Them Strategic
Involve them in strategic planning. No one wants, or is able, to raise money without a bigger plan. If you don’t currently have a strategic plan get the board involved in creating one. It must be their strategic plan if they are going to help finance it. If you already have a strategic plan, make sure that you are updating the board, and more importantly asking for their help on implementing it, at every board meeting. It’s not enough to simply create a strategic plan. You must also keep the board engaged in making it come to fruition.
- Force Them to Give
Once your board is excited about the strategic plan and the future direction of the organization, get them to invest. It is unconscionable to me that there are still nonprofit board members who don’t make a financial contribution to their organization. Make it abundantly clear that a contribution (at a level significant to them) is a requirement of service. No one can convincingly ask someone else for money if they aren’t giving themselves. End of story.
- Focus Their Fundraising
The highest and best fundraising use of a board member is major donor recruitment. Stop asking board members to be involved in any and all aspects of fundraising (event planning, direct mail letter creation, grant writing).
Instead have them focus on tapping into their networks to bring people to the organization. And no matter how “connected” you may or may not think your board members are, believe me, their networks are vast. They include their friends, family, neighbors, co-workers, social media fans/followers, church congregants, fellow alumni, and on and on. Ask each board member to come up with five people in their network that they think have the capacity to give at your major donor level. Then have the board member spend the year focusing on getting those people in the door.
- Integrate Money into Every Conversation
A lot of boards don’t like to talk about money: either raising it, or how it is spent. Boards often have limited financial management conversations, skimpy or non-existent finance committees, and a general preference for discussing mission over money. But you can’t let them get away with that. It is absolutely critical that money be fully integrated into any conversation the board has.
They must understand what the financial model of the organization is and be continually monitoring the ability of that model to deliver on mission.
- Don’t Sugar Coat Anything
The tendency in the sector is to treat a board as the organization’s most important donors and hide the truth about your organization from them. But you need to move beyond that and start helping the board to understand the harsh realities of your work. The next time your board asks you to raise more money without additional staff, or add programs without new funding, or go down a rabbit hole for no reason, tell them “No.” Give them your honest appraisal of what the organization should or shouldn’t do. And make sure they listen.
You simply cannot allow any board member to ignore or dismiss their financial responsibility to your organization.
I know that it is controversial, but I truly believe that every nonprofit should institute a minimum “give/get” requirement where every board member must either give a gift at the required dollar amount and/or “get” the remaining amount.
For example, if your give/get requirement is $500 this means that EVERY board member must give and/or get $500. So a board member could give a gift of $50 and then be responsible for “getting” the remaining $450 through the course of the year. In order for this to work, however, you must greatly expand the definition of what a “get” is, which I do below.
If you think of a board member’s “get” responsibilities in much broader terms, I find it difficult to imagine a board member who cannot bring money in the door. You just have to get strategic about how each individual board member can best contribute to the organization’s bottom-line.
And the fact remains that a majority of board members don’t like to (or simply won’t) ask for money.
The good news is that there are countless ways for board members to contribute to the bottom-line of their nonprofits without ever asking for money.
Here are some things you can ask your fundraising-shy board members to do:
- Create a business plan for an earned income venture
If you have business leaders or entrepreneurs on your board this would be a great use of their time and add tremendous value to your organization. If she can help you create a more profitable business, she is directly contributing to your organization’s bottom-line.
- Advocate for government money
You may have a board member who can’t stand the idea of asking his friends for money, but he is well connected in city, county, state or federal government and could open doors to you for government contracts, grants, fee-for-service or other government monies.
- Provide intelligence on prospects
If you have a board member who seems to know everyone in town, but for whatever reason refuses to ask anyone for money, she can still be incredibly useful. You may be getting ready to ask a prospective donor for $1,000, and this board member can tell you what that person has already given to, at what level, who else might know them and so on. When you are asking a prospective donor for money, the more information you have about them, the more successful you will be.
- Set up a meeting with a prospective customer
If your nonprofit is engaged in an earned income venture, you probably always need help with new sales. If you have a board member who is part of, or connected to, the target customer(s) of your business, he could open doors to new customers. Or at the very least, he could help you think through your sales and marketing strategies and make them more effective so that you can attract more customers.
- Email, call or visit a donor just to say thanks
The stewardship of a gift is an often forgotten, but incredibly critical, part of the fundraising process. According to Penelope Burk’s annual donor survey, 84% of donors would give again if they were thanked in a timely way. And being thanked by a board member is a bonus. A donor who renews their gift to a nonprofit is providing more money for the organization.
- Explain to a prospect why they serve
A board of directors is a group of volunteers who care so much about the mission of the organization that they are willing to donate their time (a precious resource) to the cause. As a donor, it is affirming to see that a volunteer is contributing time, but it is even more motivating to hear, in the board member’s own words, why they feel compelled to serve this organization. That story can be enough to convince someone to give.
- Host a small gathering
Over the course of a year, most people invite a gathering of friends and/or family into their home at least once. A board member could take a few minutes at their next dinner party, birthday celebration or Super Bowl feast to talk about something that is near and dear to her heart: the nonprofit on whose board she serves. She doesn’t have to ask people for money, but she could simply say, “If you’re interested in learning more, let me know.” And then the nonprofit’s staff could take it from there with those who are interested.
- Recruit an in-kind service
If a board member could remove an expense line item from a nonprofit’s budget that would directly contribute to a stronger bottom-line. For example, if a board member works at an ad agency, could he convince his company to provide some pro-bono marketing services to his nonprofit? But keep in mind, these in-kind donations must be of value to the nonprofit and provide an offset to a direct cost that the nonprofit would otherwise have to bear.
- Negotiate a lower price from a vendor
Do you have a board member with great negotiating skills (think of all of those lawyers on your board)? Could she negotiate with your insurance providers, office space rental company, or printers, for a lower price? If so, that’s more money in the bank.
- Invite 5 friends to tour the program
If a board member feels truly passionate about the work of the nonprofit he serves, then he should want to show his friends that work. He shows off his new car, his son’s graduation photos, or his best recipes, why wouldn’t he want to show off something that is near and dear to his heart–the organization he spends many hours a year supporting and building? And if one of his friends feels the spark and wants to become involved with the nonprofit himself then that is a new supporter your board member has found for the organization.
- Talk about the nonprofit on Facebook
People talk about everything else on your Facebook page, why not have a board member dedicate a post or two to her favorite nonprofit? She could share a recent blog post from the agency, or pictures of the children you work with, or an invitation to the next tour. And have them do the same on Twitter, LinkedIn, Pinterest, wherever she currently hangs out. If even just a few of her friends noticed and started to become involved she could be bringing new supporters to the organization.
- Show up to an event
Just the simple act of a board member being present at a prospecting or donor event could have huge benefit for your nonprofit. A potential donor who sees and talks with board members from the organization is going to be much more likely to give. The board lends an enormous amount of credibility to an organization. People who witness a board member’s support in person and get to chat with him about why he serves and what he loves about the organization could easily become new donors.
- Tell the story of why they serve
If a board member feels really passionate about her nonprofit capture her story. Do a video interview of the board member, or have her write her own story. These stories are gold to a nonprofit. You can turn the story into a YouTube video, a blog post, an e-newsletter article, a section on your website, a Facebook post and on and on. It’s a domino effect. If a nonprofit can demonstrate to others the passion and commitment that exists on the board, they can translate that into more support.
- Help craft a case for investment
It’s really hard for a nonprofit to raise money if they don’t have a compelling argument for why someone should give. A board member can encourage his fellow board members and the organization staff to sit down together to craft a case for investment. The exercise of articulating why someone outside the organization should care strengthens the organization’s ability to ask for money and energizes and re-engages board and staff in the process.
- Analyze a board member’s networks
Every single one of us is part of many networks. Our circle of friends, our co- workers, our neighbors, our fellow churchgoers, other parents at our childrens’ school. The list goes on and on. If a board member took 20-30 minutes to analyze all of the people she knows and whether they might have an interest in your nonprofit and the capacity to give a gift, she could uncover some prospects for your organization. But just because a board member came up with those prospect names doesn’t mean she has to ask them for money. She can give those names to the executive director or development director and ask them to pursue the prospects as potential leads.
- Go on a solicitation call
I know this list is for board members who DON’T want to make the ask, but simply going on a call doesn’t mean a board member ever has to actually ask for money. Leave that up to the executive director or development director who go with the board member. When a prospect is ready for an ask a staff member/board member pair meeting with the prospect is ideal. The staff member can do the actual asking, and the board member can be there to voice the community’s support for and investment in the organization. And that demonstration of support and investment goes a long way to turning a prospect into a donor.
- Educate a donor about the power of capacity capital
Capacity capital is the money your nonprofit so desperately needs to build a stronger, more effective organization. But because it is a new kind of money in the sector, funders need to understand why it is so important and why they should give it. If a board member could convince just one funder of the power of a capacity capital investment to transform the fundraising function of your nonprofit (to pay for a new donor database, or a Development Director for example) you could greatly increase your organization’s ability to raise money over the long-term.
- Give a gift
A board member doesn’t have to ask anyone for money if she actually gives a gift herself. It amazes me how many board members serve on a board but never actually write the organization a check. If a board member truly believes in the organization enough to volunteer her time, expertise, connections and experience, then why wouldn’t she make a financial investment as well? And that financial investment should hurt a little bit, otherwise how can she expect anyone else to make the financial sacrifices necessary to keep the organization strong?
I really could go on and on. To me, there is an endless list of ways board members can contribute to the financial sustainability of the nonprofit they serve. The trick is helping them realize that. Maybe this list will give you some ways to start that conversation with your board.
Align Executive and Development Directors
For financing to really take hold at a nonprofit there must be a productive partnership between a nonprofit’s leader (the Executive Director or CEO) and a nonprofit’s chief revenue generator (typically the Development Director). If you are fully aligning money and mission, then your Executive Director and Development Director should be planning, talking about, debating, and integrating their work on a daily basis. If that’s happening, the organization has a much better chance for long-term financial sustainability.
There are several clues that a productive partnership between a nonprofit’s Executive Director and Development Director exists:
- The Executive Director charges the Development Director with leading all financial activities that the organization pursues (public, private and earned income) instead of limiting the Development Director’s role to just private income streams (individual, foundation, corporate).
- The Executive Director asks the Development Director to create an ambitious, comprehensive financial plan in conjunction with the organization’s overall strategic plan and then to monitor that financing plan to successful implementation.
- The Executive Director creates the organization’s revenue budget through an open and honest negotiation with the Development Director and based on the organization’s financing plan, as opposed to simply telling the Development Director how much to raise.
- The Executive Director continually works to educate the entire board and staff about how critical money is to the work of the organization and how each member of the board and staff has a role to play, as opposed to leaving all revenue-generating efforts up to the Development Director.
- The Executive Director makes a constant and conscious effort to encourage the Program and Development Directors to work together, understand each other’s viewpoint, support each other’s goals and empathize with each other’s roadblocks. The Executive Director treats both positions, and both departments, as equally critical to the success of the organization.
- The Executive Director works closely with the board chair to make sure every board member is meeting their give/get requirement and doesn’t leave the Development Director alone to try to force board members to contribute.
- The Executive Director encourages and helps secure funding for the Development Director’s requests for the additional infrastructure (donor database, staffing, materials, technology) required to deliver on the ambitious goals of their financing plan.
- As with each member of their staff, the Executive Director evaluates the Development Director’s performance on an annual basis and sets performance goals for the Development Director for the coming year based on the overall strategic plan and financing plan of the organization.
As the leader of a nonprofit organization it is up to the Executive Director to forge an effective partnership with their chief money generator. An Executive Director who buries her head in the sand and leaves money up to her Development Director to figure out will eventually find her Development Director gone, her funding dwindling, and the organization’s long-term financial outlook bleak.
Get Real With Your Donors
One of the biggest challenges the nonprofit sector faces is the somewhat dysfunctional relationship between nonprofits and their donors. In order to forge a healthier, more productive relationship with their donors, nonprofits need to learn how to respond to some of the crazy things donors demand.
I firmly believe that nonprofits should no longer sit idly by when donors make unreasonable demands or give impossible instructions. It is the responsibility of a strong nonprofit leader to stand up to her donors and help educate them about the realities of the sector.
So the next time one of your donors throws one of the below at you, here’s how you can respond:
When a donor says:
“Don’t spend any of my money on fundraising or infrastructure.”
“It might seem more effective to have all of your gifts go to support direct services, but actually those services will be stronger and more sustainable if there is a healthy, effective organization behind them. That means our organization needs a capable, well-trained and paid staff; a sustainable financial model; adequate equipment, systems and space; and efficient technology. Occasionally you might consider supporting those infrastructure items so that your program gifts can go even further.”
When a donor says:
“I want to know exactly how every penny of my money was spent.”
“I hope that you are investing in our program and our management team because you believe ours is the right solution to this social problem, and we are the right team to execute on that solution. We will be happy to provide you, on a regular basis, results about how the program grows and the impact it achieves, but the kind of extensive, detailed, and funder-specific reporting that you are requiring would take us away from delivering the program and creating impact, and I know you don’t want to do that.”
When a donor says:
“I won’t fund your program without proven results, but I won’t fund an evaluation study.”
“When you say that you are putting our organization into a catch-22 of needing a key element to get funding, but not having the funding to get the key element. It’s an unwinnable situation. We would love to be able to demonstrate the kind of results you are requesting. However, we have not yet identified a donor or group of donors who are willing to fund an evaluation study. Would you be willing to lead an effort to get a small group of funders together to fund such important work?”
When a donor says:
“I want your nonprofit to make huge changes from my $10,000 gift.”
“We agree that the change you would like to see is very exciting. We have done our research on the type of change you would like to see and it would cost approximately
$100,000 [insert the correct figure] to bring to fruition. Is $100,000 a gift you would like to make to our organization? If not, would you be willing to identify a group of funders who could join you to fund this change? And if not, then we would gratefully accept your $10,000 gift to support our regular program operations.”
We have to create the nonprofit donors we want to see in the world. When a donor makes an unrealistic demand, use it as an opportunity to educate them about the realities of the nonprofit world. In so doing, you are not only standing up for your nonprofit, but also creating a better donor for the whole sector.
Abandon Ineffective Fundraisers
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.
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 an annual gala year after year simply because they always have, or because the 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 move on. 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 abandon those activities, they will eventually bleed your nonprofit dry.
Here is the approach to take:
You need to determine the net revenue and cost to raise a dollar of every revenue- generating activity in which your organization engages. This includes each event, direct mail and email campaign, grant, major donor campaign, and so on. 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.
The formula for Net Revenue is:
Net Revenue = Gross Revenue – Fundraising Costs (Direct and Indirect)
- The second critical calculation is Cost to Raise a Dollar. This calculation tells you how much it cost your nonprofit to raise the Net Revenue you determined above in #1.
The formula for Cost to Raise a Dollar is:
Cost to Raise $1.00 = Costs (Direct and Indirect) / Net Revenue
Once you’ve completed these two calculations for every moneymaking activity in which your nonprofit engages, compare the 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 in this list.
- Evaluate: Activities with a Cost to Raise a Dollar just under $1.00 go on this list. 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 go on this list. These are the most profitable to your nonprofit, so you should work to invest more time and resources in these activities.
It’s not enough to have the Executive Director and/or Development Director in agreement on 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 all through your Net Revenue and Cost to Raise a Dollar calculations for that particular activity. Help them understand that this particular event, campaign, or 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 an unprofitable activity 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.
Kiss That Endowment Dream Goodbye
A nonprofit endowment is a body of money set aside by a nonprofit to generate long- term income for the organization’s operations. I can’t tell you how many times I hear nonprofits say that their money woes would be solved if they could just raise an endowment. Some even forgo easier, more reasonable forms of revenue-generating activities in order to pursue pie in the sky endowment campaigns. That is crazy.
I believe that most nonprofits should kiss their endowment dreams goodbye and focus instead on finding a more realistic path to financial sustainability.
I’m not suggesting that endowment campaigns are wrong for all nonprofits. But here’s why they don’t make sense for most organizations:
Endowment money is extremely difficult to raise.
The majority of donors want their dollars to go directly to the day-to-day work of a nonprofit. It is hard enough to convince a donor to fund a capacity capital campaign that would strengthen the organization. But convincing a donor to give a nonprofit money to put in the bank so that the organization can be relieved of some of the burden of otherwise finding a sustainable financial engine is really hard.
Endowments are an inefficient use of money.
Let’s say a nonprofit was able to raise an endowment of $1 million and then enjoy an annual 5% return. This would give them $50,000 of operating revenue each year.
Sounds great, right? Wrong. If instead the nonprofit could use ALL of that $1 million as capacity capital to build their infrastructure, staffing, technology, or systems, those transformations to the organizational structure could yield many times more than $50,000 per year in financial sustainability and/or social impact.
Endowment campaigns require a major donor base.
Most nonprofits have not yet figured out how to attract and retain major individual donors. Thinking that you can leap frog the donor cultivation process by going from a few small individual donors to large, endowment donors is crazy. It takes years of on- going cultivation of high capacity donors to secure endowment gifts. Nonprofits would be far better served by using their time and resources to create a solid annual individual donor campaign based on pull marketing efforts for smaller donors and one-on-one cultivation of larger major donors.
There is no magic bullet for financial sustainability.
When I hear nonprofits talking longingly of endowments it is with an unspoken assumption that once secured, an endowment would solve all of their money problems. But the truth is that there is no magic bullet for sustainable nonprofit funding.
The only way to create a sustainable funding engine for your nonprofit is to create a financial model that fully aligns your mission and core competencies. I’ve found that the nonprofit leaders who are most interested in the endowment magic bullet theory are those who are most uncomfortable with money. Instead of fearing money, you must embrace it and learn how wield it to your advantage.
Instead of wasting time, effort, and resources on endowment campaign planning, move your nonprofit to true long-term sustainability by creating a financing plan for your organization. Stop trying to “solve” your money problems and instead embrace money as an incredibly useful tool for creating lasting social change.
Reinvent the Capital Campaign
There are many perceived benefits to a bricks and mortar capital campaign. They can be a vehicle for asking for bigger gifts, a way to get in front of the community and be “noticed,” and a method for energizing the board and giving them something to do.
But there are often huge downsides to these campaigns. Often the cherished new building has much higher ongoing maintenance costs that were not factored into the campaign. A capital campaign can also cannibalize regular annual donors. And most detrimental, a new building often does not increase the nonprofit’s ability to create more social change. Does an in-school mentoring program really need a big, new headquarters? Do the costs for a nicer, larger office space directly result in more children being mentored or mentored more effectively?
What if instead of raising millions of dollars for a new building, a nonprofit raised that much money, through a capacity capital campaign, for the things it really needs to create more social change:
- New technology
- New online fundraising software
- A new donor database
- Highly skilled and experienced development staff
- A program evaluation study
- A more effective program-delivery system
Capacity capital is the money that nonprofits so desperately need to build strong, effective, sustainable organizations that can create more social change. It is a one- time investment of money to add new technology, an evaluation system, a new revenue function–ultimately money to grow or strengthen the organization. And it is infinitely more effective at achieving social impact than a traditional bricks and mortar capital campaign.
With the money from a capacity capital campaign a nonprofit could strengthen their organization and start:
- Doing a better job of delivering the program
- Raising more revenue annually through a more effective fundraising function
- Securing more external support because they can prove program results
Instead of depleting the organization through cannibalized donors and increased on- going maintenance costs (as a traditional capital campaign does), a capacity capital campaign actually strengthens the organization and allows it to achieve more social impact, more effectively.
Before your nonprofit decides to embark on a traditional capital campaign, take a big step back and ask your staff and board some hard questions:
- What are we hoping to gain from this capital campaign?
- Will this new building contribute to an increase in outputs (services) or outcomes (changes to our clients’ lives)?
- Are there other items we need more than a new building in order to effectively do our work?
Nonprofits need to stop raising millions of dollars on physical monuments and instead start raising dollars for the capacity elements that will actually help them create more social change. That would be revolutionary.
We are living in a new reality. And the old rules of nonprofit funding simply no longer apply. Those nonprofits that take a big step back and create a smart strategy for bringing enough money in the door to achieve their mission are the ones that will survive and thrive in this new environment. In creating that strategy they are moving to finance, instead of fundraise for, their organizations. And the result is a stronger, more effective, more sustainable organization with excited, energized, empowered board, staff and donors.
It may sound like a dream, but it can become a reality for your organization. It doesn’t have to be so hard.
Here are some ways you can start to move your nonprofit from fundraising to financing:
- If you want to read case studies of other nonprofits that moved from fundraising to financing and dramatically increased their financial sustainability, go to the Clients page of our website.
- If you’d like to explore whether our Financial Model Assessment or Financing Plan consulting services are right for your nonprofit, email [email protected] to schedule a free consultation.
- If you’d rather get started on your own, download our Build a Nonprofit Financing Plan.
- Check out the other Social Velocity e-books, guides and tools at the Tools page of our website.
I hope you found this e-book helpful. As always, I welcome your feedback or questions about any Social Velocity tool. Please email [email protected] with questions, comments or feedback.
This e-book was designed to help you think about transforming your nonprofit. If you want a customized approach, or need help engaging more board, staff and donors in the change process, call (512) 694-7235 or email [email protected] to schedule a free consultation with Nell Edgington.
Social Velocity is a management consulting firm that helps nonprofits become more strategic, sustainable, and above all, more effective at creating social change.