Donors continue to look for more accountability and transparency from non-profits, especially regarding fundraising. Not only is the sum of money raised in campaigns meaningful, but how efficiently you are able to raise it, is fundamental to the non-profit’s success. For instance, one activity may project higher revenues than another activity, but measuring the activities’ success requires more than just evaluating the gross revenues.
Interested parties look beyond total dollars raised to also consider associated costs in fundraising efforts. Return on investment (ROI) focuses on the returns and is a great measurement of the overall big picture that donors are looking for. This ratio provides donors with the information that they need to make a decision on how they contribute to the non-profit. Similar to different product lines in a for-profit entity, this also helps the board decide what works and what does not.
Doing the Math
The formula for ROI is fairly simple:
ROI = Fundraising Revenue / Investment in Fundraising (Fundraising Expense)
Focusing not only on the big picture, but on specific fundraising activities, will allow your organization to identify its weaker methods and strategies and improve its overall fundraising performance. Which of your fundraising activities generates the highest return? Once you establish a baseline, you can see where your results are improving and which programs are most effective.
Some organizations feel it is more meaningful to measure gross revenues raised compared to the fundraising expenses for that effort. However, many follow a more traditional method of measuring ROI using net revenues (revenues minus the related expenses) when comparing to costs. Either way is fine, but you must be consistent by measuring your revenues in the same way for each year and campaign. These metrics are only meaningful when they are evaluated comparatively from one year to the next.
There are other considerations. How, for instance, do you compute your “fundraising expense”? Although the revenue information is easily available to your development staff, your accounting staff should be recruited to gather data on expenses at the same level of detail by campaign or fundraising effort.
Your fundraising expense should include the direct costs of the initial effort, as well as later efforts. Initial costs might include the investment to create a new donor relationship, for example, online advertising costs or the costs of a phone campaign, while subsequent costs include those associated with maintaining that relationship, for instance, the costs of a renewal mailing.
What about indirect or overhead costs? The key again here is consistency. If you exclude those costs that you would incur with or without the monitored activity, such as the costs for your website or donor database, make sure they are excluded from every campaign metric. For both costs and revenues, you should use rolling averages that cover three 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. But keep in mind that ROIs can vary greatly by activity and a lower ROI doesn’t necessarily mean you should cut the activity.
A Win-Win Scenario
Going to the effort of computing the ROIs is a win-win. With this information in hand, you can make more informed decisions and satisfy your board of directors, major donors and other involved in the non-profit.
For more information, contact Kevin Omahen at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.