In this chapter we examined how to assess fundraising performance, looking at the weaknesses of aggregate fundraising ratios and suggesting a range of other more appropriate metrics. We also examined how to calculate ROI for a fundraising investment, the concept of a payback period and the use of discounted cash flow techniques.
The supporting information for this chapter is grouped as follows:
Aggregate Fundraising Ratios
Conducting An Analysis of Fundraising Performance
Sector Benchmarking Initiatives
Investment Appraisal Techniques
We would like to apologize for a number of errors that appeared in Table 9.1 of the textbook. The correct version of the table can be downloaded click here.
Aggregate Fundraising Ratios
a) FACE Ratio
While it is not legitimate to use ratios to compare the performance of one organisation with that of another, this hasn’t stopped researchers from conducting such analyses and seeking to plot trends and/or highlight poor or exceptional performance.
The ratio of fundraising and administration costs to total expenditure (FACE) is frequently used as a benchmark to measure the efficiency of charities. There is a general perception that a FACE ratio of more than 30% is a cause for a concern (i.e. a charity should spend at least 70 cents of every $1 donated on the cause), but there is no clear rationale for why this might be the case.
It has also been argued that a low FACE ratio should be an equal cause for concern. FACE ratios of less than 10% might suggest that the charity is not investing sufficiently in an administrative infrastructure to support its charitable work, nor is it making an adequate investment in fundraising to safeguard the charity’s future.
Data on the FACE ratio and the behavior of administration costs can be found in the Nonprofit Overhead Cost Study - hosted at the Urban Institute
b) Cost Per Dollar Raised
A further focus of public and media interest is the cost per dollar raised. It is cited as a key measure of fundraising efficiency and perhaps a factor to be born in mind when donors take decisions in respect of which organizations they might elect to support. In a large scale survey of fundraising costs in the U.S, Rooney et al (2003) identified that it costs an average of 24 cents to raise a dollar. Other studies have reported similar levels of cost, typically of the order of 15-30 cents to raise a dollar depending on the category of cause (animal welfare, arts, education etc) and the size of the organization (as measured by income). On the basis of these figures we might legitimately conclude that a organization spending 20 cents to raise a dollar is doing well, while an organization spending 35 cents to raise a dollar is not. Right?
Wrong. Even Guidestar cautions that this is the least useful figure that individuals might calculate from their data. It suffers from a number of fundamental flaws:
1) These figures are grounded in poor quality data: Remember that as we noted earlier almost 60% of nonprofits claim to have zero costs of fundraising. If overall ratios are calculated from 990 data they will therefore be meaningless.
2) Variations in accounting policies and thus the definitions of key categories of cost: As Pharoah (1997) notes, what may be classified as fundraising expenditure for one organization may be classified as charitable expenditure by another.
3) Education versus fundraising: Equally, many organizations have a mission which requires them to involve themselves not only in benefiting the members of a certain target group, but also to educate the general public about the needs of this group or the issues it faces. Thus a charity working with the blind or partially sighted may not only endeavor to improve the lives of individuals with these conditions, it may also seek to raise the public awareness of the wider issues (e.g. discrimination) facing this section of the community. Those organizations that feel it important to develop such a role face a dilemma in accounting terms over the manner in which they report the costs of this awareness generation or educational activity. Since there are often substantial benefits to be gained by combining these activities with those specifically designed to raise funds it often becomes impossible to distinguish between them. Is an ad from the American Heart Foundation a fundraising ad, or is it part of a wider effort to raise an awareness of the causes of cardiovascular disease?
4) Annual fluctuations: Using simple ratios to compare between organizations could also be criticized on the grounds that such figures (unless averaged over a three to five year period) will fail to take account of large one-off contributions such as a particularly large gift or an exceptional bequest.
5) The popularity of the cause: Some categories of cause are easier to raise funds for than others. Disability charities, for example, will find it more difficult to raise funds than those working in the domains of medical research or education (Sargeant and Kaehler 1998).
6) The age of the fundraising department. A mature, professionally run development program will be expected to produce a higher return on investment than a newly formed department.
7) The size of the organization. Previous research has indicated that some forms of fundraising, (e.g. direct mail) exhibit significant economies of scale. The greater the number of mailings the lower will be the unit cost. Larger organizations therefore tend to have a better pattern of performance than smaller organizations (Sargeant and Kaehler 1999), at least until we examine very small organizations where all the fundraising may be conducted by volunteers and where as a consequence there is a reversal of this effect. Very small nonprofits can also have good fundraising ratios.
8) The profile of the constituency. Some nonprofits appeal to economic and geographic communities that are wealthier than others.
9) The categories of fundraising undertaken:
10) Donor acquisition versus development: Organizations focusing on acquisition will have significantly poorer patterns of performance than those able to focus on retention.
11) Different categories of campaign: Capital campaigns generate very different returns than the annual fund. An aggregate ratio that blends these two very different forms of fundraising is therefore unhelpful.
In seeking to meaningfully appraise the fundraising performance of an organization and to compare this with others it is necessary to account for all these factors. It clearly isn’t realistic to expect members of the public to do this and thus the current focus of watchdog bodies on aggregate ratios is misleading and unfortunate.
Author and fundraising guru Mal Warwick wrote recently that:
"The 'overall fundraising Cost to Raise a Dollar' is a myth. There is NO such standard, and anyone who tells you there is one should survey the real world of fundraising in all its diversity. One organization might be embarrassed to spend more than a dime to raise a dollar, while another might be fortunate to squeak by with 40 or 50 cents on a dollar -- and both might be ethically run, well-managed organizations."
We couldn’t agree more !
For those wanting more information on why this is such an inappropriate figure we can recommend the excellent resource assembled by Supporting Advancement.
Conducting An Analysis of Fundraising Performance
There are a number of excellent resources designed to assist fundraisers and board members in appraising the performance of their fundraising. We list three below – but would also point readers to a text that is now rightly considered a classic – Jim Greenfield’s ‘Fundraising Cost Effectiveness.’ Another of those that we believe should sit on every fundraiser’s shelf.
In respect of web resources:
The Urban Institute also host a resource published by another sector commentator we greatly admire – Bill Levis. His paper on ROI analysis can be found – click here
Benchmarking Fundraising Costs
Typically, the assessment of fundraising performance will not take place in isolation. Board members, donors and other stakeholders are frequently concerned with questions such as:
How does our fundraising compare with our competitors?
How do we know we are as efficient as we can be?
How does our return on investment on each form of fundraising compare with other charities in our sector (cause)?
Why do we spend so much more on fundraising than charity X?
Source (Aldrich 2009)
To answer these questions it is necessary to look outside the organization and to identify data that may be used as the basis for comparison. This may be data drawn from research, a study of some kind or data shared between organizations all looking to share in the benchmarking exercise. Our sector has a strong history of collaboration between organizations and it may be possible for fundraisers to exploit their contacts and to share information with peers to determine how other organizations are performing. In doing so it should be remembered that different organizations will have different approaches to accounting for fundraising and thus fundraisers need to ensure that they are genuinely comparing like with like.
Sector Benchmarking Initiatives
There are also a number of excellent benchmarking exercises that nonprofits can participate in organized by sector bodies.
The Fundraising Effectiveness Project (FEP)
The FEP is a project co-sponsored by the Association of Fundraising Professionals and the Urban Institute in partnership with five other sector bodies. It is free to participate in the FEP and anyone with donation data spanning two or more years may participate. Participants are required to input their data either online by completing a survey or by using the facility now provided by the leading providers of fundraising software such as Blackbaud (The Raiser’s EdgeTM, eTapestry or Donor Perfect. The survey gathers data on both the value of gifts and the number of donors acquired and lost over the year. Details can be found – click here
The basic concept underpinning the survey is that an organization’s overall growth in giving from one year to the next is actually the net result of gains minus losses. Thus, growth in giving is increased both by maximizing gains and by minimizing losses.
Gains consist of increases in gift amounts by upgraded donors and gifts by new donors and recaptured lapsed donors. Losses consist of decreases in gift amounts by downgraded donors and lost gifts from lapsed donors. Crucially, given our previous discussion, it is possible to undertake this comparison against other organizations of a similar size, age, category of cause, and region (based on zip code). It is also possible to identify distinct percentiles of performance giving participants a clear idea of how they compare with other organizations.
The software supplier Blackbaud offers a service to its clients which allows them to analyze the performance of their direct response fundraising. The Target Analytics Index of Fundraising Performance works with data drawn directly from the databases of participating organizations. For the 12 months to the third quarter of 2008, Target Analytics evaluated transactions from 74 organizations, including over 37 million donors and more than 68 million gifts totaling over $2 billion in revenue.
To maintain comparability participation in the index is limited to organizations that meet size and geographic requirements as well as other terms and conditions. Information about eligibility is provided – click here - and Target do post their quarterly analyses online, so other interested organizations can use the data.
CASE Benchmarking Toolkit
The CASE toolkit is available to advancement services, alumni relations, communications, fundraising, marketing or related professionals at CASE member institutions. It allows fundraisers at a group of institutions to get together to compare staffing, budgets and funds raised.
The Association for Healthcare Philanthropy offer a fee based service to their membership. Their Performance Benchmarking Service is designed to compare one organization's business practices against an industry leader in order to identify opportunities for improvement and development. Their database was specifically designed for fundraising professionals working in the health care domain.
In the United Kingdom charities can subscribe to the Fundratios service, offered by the Centre for Inter-Firm Comparisons. The project has been running for over 20 years in conjunction with a group of leading charities and the Institute of Fundraising. Participation rates vary from year to year and typically at least 40 very diverse organizations participate.
The public information website charityfacts includes a section dedicated to students and researchers. Here the authors post the detailed findings of an occasional study conducted by the Institute of Fundraising to explore the aggregate performance of fundraising undertaken in the UK and also the performance of specific techniques. It is nowhere near as detailed as the excellent Fundratios study, but it does typically include data from a much larger number of organizations. It provides headline figures only.
Taking Investment Decisions
In the chapter we provide an introduction to a variety of investment appraisal techniques. Unfortunately there are no dedicated web resources to guide fundraising investment decisions, but each of the websites we list below cover very similar ground to our chapter and provide examples, which although grounded in the for-profit sector, can provide very useful practice with the techniques
Making The Case For Investment
Fundraisers making the case for organizational investment in a fundraising project or area of fundraising operations will frequently need to make a case to senior management and/or the Board. This case will typically comprise the following sections:
Background: A short introduction to the proposal should be provided with information about the rationale for the investment
Proposal: A brief summary of the proposal should be provided, highlighting key benefits and the level of investment required. Included here may be the forecast return on investment with a comparison to the nonprofits policy on this issue. An assessment of the likely cash required and the forecast payback period will certainly be required. If the proposal is longer term in nature it may also be appropriate to provide DCF projections (reflecting the organization’s cost of capital) and to consider comparing the current proposal to other options considered. An explanation for the choice of the current proposal should be provided.
Implementation plan: The plan should also show the various stages of the proposal, demonstrating how the achievement of key milestones will be monitored and controlled as the proposal is implemented.
Risk Analysis: As we noted above the fundraiser should examine in further depth the key risks affecting the proposal and the possible financial consequences of these. These can be linked to milestones in the implementation plan so that it is clear what action would be taken if an adverse risk materialized.
As Sayer (2003) notes, this does not have to be a large document. It should however be proportionate to the level of investment demanded, the degree of risk and the timeframe over which the investment would pay back.
Rooney, P.M., Hager, M.A. and Pollak, T.H. (2003) ‘Research about Fundraising and Administrative Costs.’ Giving USA Update, Issue 2. Indianapolis: AAFRC Trust for Philanthropy.
Sargeant A and Kaehler J (1998) Benchmarking Charity Costs, Charities Aid Foundation, West Malling, ISBN 1-85934-089-X
Sargeant A and Kaehler J (1999) ‘Returns on Fundraising Expenditures in the Voluntary Sector’, Nonprofit Management and Leadership, 10(1), pp5-19
Sargeant A., Lee, S. and Jay E (2009) 'Communicating the Realities of Charity Costs: An Institute of Fundraising Initiative,' Nonprofit and Voluntary Sector Quarterly, 38(2), 333-342.
Sayer K (2003) Making The Case For The Investment in Fundraising, International Journal of Nonprofit and Voluntary Sector Marketing, 9(2), pp159-162.