Search TXNP
txnp temp ad

< More How to's

Tuesday, June 27, 2017

Share: facebooktwitterdigg

Fundraising ratios and other deceptions
Mal Warwick

October, 2007

Conventional wisdom holds that the best way to measure your organization’s efficiency is to look at the percentage of your income spent on overhead and fundraising. The popular press, the charitable “watchdog” agencies, and our own ingrown instincts all tell us this is the right way to determine whether you’re doing a good job of running your nonprofit organization. As the argument goes, if you spend more than 10 or 20 cents to raise a dollar—a “fundraising ratio” of 10-20%—then there must be something wrong with you.

Well, that’s bunk.

The fundraising ratio is a meaningful measurement for America’s biggest charities: the Red Cross, the Salvation Army, UNICEF, Goodwill Industries, CARE, the American Cancer Society. All these groups are decades old, command instant name recognition, and have large development departments with the talent and the resources to use every conceivable means to raise money and can make the most of every dollar spent on fundraising. Each of them raises hundreds of millions of dollars every year, sometimes even topping one billion. But applying the same simplistic criteria to young public interest groups or charities with budgets a hundredth or a thousandth the size usually makes no sense at all.

In exceptional cases, where fraud or flagrant mismanagement is suspected, an extremely high fundraising ratio may be an early warning signal. An organization that’s spending 95 cents to raise every dollar after three or four years of extensive direct mail promotion is clearly not worthy of donors’ support. A closer look may reveal that the organization is promising a miraculous cancer cure and working out of a third-floor walkup and a post office box, and that the organization’s founder and $200,000-a-year Executive Director is the brother-in-law and former employee of its direct mail consultant.

But, while fraudulent charities have existed since a charitable impulse moved some far-sighted noble to give away the first shekel, they are uncommon today. It’s a tragic mistake to hobble thousands of sincere and effective public interest organizations with rules designed to inhibit a few bad actors. Moreover, where fraud is likely, an unusually high fundraising ratio is probably just one of many grave and obvious problems.
If charitable donors were to limit their gifts to the handful of the nation’s more than one million nonprofit tax-exempt organizations that meet these conventional criteria for nonprofit performance, charities would be few and far between. Groups springing up to meet new needs—or simply to keep the old agencies honest—would die as quickly as they were born. Because only an organization with a truly secure funding base can fulfill these extravagant regulatory fantasies.

When a few phone calls and a lunch meeting with a wealthy donor can produce a multi-million-dollar gift or bequest, fundraising costs are minimal when expressed as a percentage of the proceeds. Much the same goes for an organization with a large, loyal following of donors who can be counted on to renew their support year after year. In either case, the fundraising ratio is likely to be low.

But a small, less well-established group—or one just starting out to address a newly emerging need—is not likely to be in a position to achieve the same results with such little effort. It may take several years of repeat giving and continuous cultivation before you can count on getting gifts from a donor.

Fundraising is hard work—and for most nonprofits, it’s expensive, especially at the beginning.

Partly because so many so-called “authorities” keep beating the drum for the most restrictive definitions of acceptable fundraising practices, relatively few donors will give more than token sums to any but the best-established, blue-ribbon charities. To smaller and newer organizations, gifts are typically much less generous. And obtaining them can take a great deal of time and money. People tend not to trust what they don’t know.

To show the contrast, let’s look at two hypothetical nonprofit organizations:

(A) Founded 30 years ago, Charity “A” has an annual budget of $12 million.

Trustees and major donors

$4,000,000

Bequests and planned giving programs

$2,000,000

Income from endowment (established 15 years ago)

$2,000,000

Foundation and corporate support

$2,000,000

Direct mail and telephone fundraising (from 30,000 donors)

$1,000,000

Sale and licensing of products and services

$1,000,000

Total income:

$12,000,000

(B) Founded three years ago, Organization “B” has a $2 million budget.


 Foundation support

$900,000

Direct mail and telephone fundraising (from 20,000 donors)

$600,000

Trustees and major donors

$400,000

Sale of products and services

$100,000

Total income:

$2,000,000


It’s entirely possible that Charity “A” and Organization “B” could each be spending $1 million per year on fundraising and overhead. For “A,” this represents one-twelfth of its budget, or eight cents on the dollar. For “B,” $1 million is half its revenue, or 50 cents on the dollar—more than six times as high a fundraising cost as that of “A.” Does that make “A” six times “better” than “B”?

Not on your life!

Leave aside for the moment the possibility the $11 million that “A” has left over to spend directly on its programs might just be going down the drain on misguided or irrelevant projects, getting socked away in fatter and fatter “reserve” funds, or even keeping a passel of unimaginative people at work in featherbedding jobs. After all, “B” could just as easily have misbegotten priorities or incompetent staff. Let’s just look a little closer at the income side of the ledger. The contrast is dramatic:

“B’s” work with major donors is just beginning. It’s had few opportunities to identify or cultivate major donors or to establish a program of planned giving and bequests, much less an endowment fund. These are “A’s” principal sources of financial support, but they took years to develop.

Nearly half of “B’s” $2 million budget is contributed by foundations. For “A,” which receives grants worth more than twice as much, foundation and corporate support is only one-sixth of its total funding. Most foundations—and particularly corporate philanthropies, which may have stockholders to worry about—favor name-brand charities. Money attracts money.

With its name less well established and its merchandising program in its infancy, “B’s” income from licensing and sale of products is only a tenth as great as “A’s.” Name recognition usually takes time to establish, and familiarity sells products as well as programs.

The real measure of a nonprofit organization’s effectiveness is the cost of the results it gains. By that yardstick, many nonprofits with enviable fundraising ratios are singularly ineffective when compared to some of the scrappy, innovative, grassroots organizations with which I’m familiar—ventures that rarely are able to raise a dollar for less than 35 or 40 cents.

Another big contrast between Charity “A” and Organization “B” lies in their direct mail and telephone fundraising programs:

For “A,” raising money from 30,000 direct mail donors, a great many of them of long standing, is a very profitable proposition. To replace those five or six thousand lost by attrition each year requires little new investment in donor acquisition. The full cost of “A’s” direct mail program may be no more than $250,000. An overall revenue-to-cost ratio of four- or even six-to-one is not at all unlikely in a mature program of this sort.

“B’s” fast-growth direct mail strategy looks a lot different. In its second year of aggressive donor acquisition, “B” might even be spending on direct mail more than the $600,000 it’s raising.

“A’s” direct mail program obviously emphasizes the cultivation and resolicitation of loyal, long-term donors. For “B,” direct mail and telemarketing are tools to meet a different—and more costly—challenge: to identify and recruit new donors.

How does Organization “B” get to be like Charity “A”? By doing precisely what it’s now doing, methodically building and cultivating its donorbase year after year after year.

Copyright © 2004 by Mal Warwick. Excerpted from Revolution in the Mailbox: Your Guide to Successful Direct Mail Fundraising, Revised and Updated (San Francisco: Jossey-Bass Publishers, 2004).

This article was reprinted with permission from Mal Warwick. Consultant, author, and public speaker Mal Warwick has been involved in the not-for-profit sector for more than 40 years. He has written or edited seventeen books of interest to nonprofit managers. He has taught fundraising on six continents to nonprofit executives from more than 100 countries. Copyright (c) by Mal Warwick. All rights reserved.



rss 

Your TXNP Weekly E-Newsletter is made possible by the generosity of:

FROST in many Texas cities
THE SID RICHARDSON FOUNDATION in Fort Worth


TXNP Professional Members Are Dedicated to Texas and Texans.

Aurora Grants & Consulting |Dawson Murray Teague Communications | ELITE Research | FOR THE PHILANTHROPIST | Graystone Consulting | J A Churchill Associates | John F. Lewis PC | McConnell & Jones LLC



Sign up for your personal TXNP E-Newsletter

at-t Meadows Foundation express news HOBLITZELLE FOUNDATION v greenly zachry foundation w b h b bank of america southwest airlines Sid W. Richardson Foundation forst