As competition continues to increase for contributions, donors have begun to look for more accountability and transparency from not-for-profits, especially regarding fundraising. Not only is the sum of money raised in campaigns meaningful, but how efficiently the money is raised is significant as well.
Donors and granting agencies look beyond total dollars raised to also consider associated costs in fundraising efforts. Cost ratios that present fundraising costs as a percentage of funds raised (also known as cost-per-dollar) focus on the expenses of fundraising, while return on investment (ROI) focuses on the returns. It is imperative to track both.
Determining ROI Versus Cost Ratios
The formula for ROI is below:
- ROI = fundraising revenue/fundraising expense
Focusing on specific fundraising activities will allow you to identify the strengths and weaknesses of activities in order to improve your overall fundraising performance. It is beneficial to determine which fundraising activities generate the highest return. Once this is established, you can see where your results are improving and which programs are most effective.
Some organizations feel that is it more meaningful to measure gross revenues compared to the fundraising expenses. However, many follow a more traditional method of measuring ROI that uses net revenues (revenues minus expenses) when comparing the costs. Either way is acceptable, but you must be consistent with measuring your revenues in the same method for each year and each campaign.
Calculating the Inputs
How do you calculate your fundraising expenses? Although the revenue information is usually available from your development staff, your accounting staff also needs to be involved in order to gather detailed expense data.
Your fundraising expenses should include the direct costs of the initial and subsequent efforts. Initial costs might include the investment to create a new donor relationship, such as online advertising costs, while subsequent costs include those associated with maintaining the relationship, such as a renewal mailing.
What about indirect or overhead costs? In this case, the most important thing is to be consistent. If you exclude costs that you would incur with or without the monitored activity, such as the costs for your website or donor database, make sure that they are excluded from every other campaign metric as well. For both costs and revenues, you should use rolling averages that cover a span of up to five years. This will reduce the effect of one-offs, whether in the form of a significant donation or an economic downturn. You will also avoid penalizing fundraising activities, such as a major gift campaign, that require some time to show results.
Calculating these metrics will help you make better decisions when it comes to allocating your fundraising resources. Keep in mind that ROIs can vary greatly by activity, and a lower ROI does not necessarily mean that you should cut the activity. However, it does suggest that you should take a detailed look to further evaluate its effectiveness.
A Win-Win Scenario
Going to the effort of computing the cost ratios and ROIs is a win-win. With this information available, you can make informed decisions and satisfy your stakeholders. It is important to discuss these options with your tax advisor before making any commitments. Please contact us with any questions or concerns regarding the evaluation of your fundraising returns.