Move Over Expense Ratios
CHARLIE BURKE, CPA
Although still important to donors, the expense ratio (what a charity spends on administrative, overhead and fundraising costs vs. program costs) is now sharing the spotlight with other measurements as a way to judge an organization’s effectiveness.
The traditional appeal of expense ratios is obvious. They are easy to calculate using data from financial statements or Form 990s and provide a standard metric with which to compare all not-for-profits. Watchdog groups vary somewhat in the expense ratios they advocate, but most agree that “effective” not-for-profits spend at least 65% to 75% of their budgets on program costs.
Many in the not-for-profit community question the benefit of expense rations. Clearly, they do not tell the whole story. In addition, because watchdog groups, donors, foundations and government regulators have placed such a strong emphasis on this single metric, many not-for-profits felt pressure to under-track and under-report actual administrative and fundraising spending. Some not-for-profits have even neglected to make the organizational infrastructure investments that are essential to continued health and future growth. Ironically, pinching pennies to improve the appearance of fiscal responsibility can undermine an organization’s long-term effectiveness.
Some influential groups have begun to shift their emphasis on expense ratios to other areas. The Charities Review Council, for example, revised its Use of Funds (essentially, an expense ratio) standard to reflect that no one range is ideal for every charity and to encourage more infrastructure investment. Other groups such as Charity Navigator, GuideStar and GiveWell do not believe that expense ratios or executive salaries provide meaningful data to determine a not-for-profit’s impact and utilize other data to rate not-for-profits.
Many not-for-profit professionals have advocated placing less emphasis on “outputs” — such as the percentage of funds spent on programs — in favor of “outcomes” — a program’s measurable impact in the community. Not-for-profits need to craft a clear and compelling message to illustrate financial performance. A good starting point is to develop a method of measuring your success appropriate to your mission. Track these results and explain them clearly in the “Summary” section on your Form 990 and in fundraising and marketing materials. Be proactive in telling your story. Not only are real-life examples of program outcomes compelling, but the reporting of the results — not just dollars spent and activities conducted — strengthens an organization’s position for fundraising and public trust over time.
Not-For-Profit Newsbit: Simple and Secure
The 2013 Blackbaud Charitable Giving Report stated that online giving increased 13.5% compared to 2012, which had shown an increase of 10.7% from 2011 – two consecutive years of double-digit growth. More donors are making online contributions to not-for-profit organizations in the United States than ever before; no doubt this trend will continue. The generation that grew up browsing and shopping on the Internet will be even more likely to log on to contribute to their favorite organizations.
Major organizations have been effectively using the Internet to raise revenue for years, especially for specific events, such as annual nationwide races. Now, even the smallest organizations can easily create a platform through which Internet users can make contributions on a one-time or recurring basis, purchase tickets for fundraising events, or pay fees and dues. There is a dizzying array of options to consider from all-in-one,“off-the-shelf” software to custom-designed donor management and fundraising integrated packages.
If your organization does not already have the capability to collect online contributions, it is time to join this growing movement. As when purchasing any service, you will want to be certain that the cost and fees associated with an online fundraising vehicle fit within your budget and that the capabilities of the system are appropriate for your needs. Ideally, online giving should be simple and secure for you and your donors. Making a gift online should be quick, easy and convenient. Donors should have the assurance that their information is being handled as responsibly as the funds they are contributing. The back-end accounting and reporting need to be workable, enabling staff to efficiently track and record transactions, maintain useful records and maximize the benefit of this valuable resource.
For questions, contact Margaret Swain at 312.670.7444. Visit orba.com to learn more about our Not-For-Profit Group.