BoardSource: Calculating Costs Is Just The Start

As watchdog groups, government agencies and donors take closer and closer looks at organizational expenses and the portion of contributions going toward missions, fundraising efficiency has become as important as ever. Simple means of measuring such efficiency is not cut and dried, however.

BoardSource, based in Washington, D.C., has sought to help organizations gain a better grasp of their fundraising efficiency with a new report, Measuring Fundraising Effectiveness – Why Cost of Fundraising Isn’t Enough. The report is based on a fundamental agreement that funds are needed to help raise support for organizational missions, disagreement that that percentages going toward fundraising are irrelevant and belief that notions that responsible organizations spend as little as possible on fundraising are a dangerous misconception.

The report includes three formulas that can be used collectively to sketch out an accurate picture of an organization’s fundraising effectiveness and health. They are:

* Total fundraising net. This figure defines how much money is available to spend on organizational missions as a result of fundraising. The figure is easily calculable by subtracting total fundraising expenses from total amount raised. In other words, if an organizations raised $1 million and spent $200,000 on staff and other expenses to raise that money, the fundraising net is $800,000.

* Dependency Quotient. This figure measures risk and how dependent an organization is on its top donors. It can be calculated by taking the sum of contributions made by the organization’s three largest donors and dividing it by total organizational expenditures – the lower the number, the more resilient the organization. For example, if an organization’s five largest donors contributed $250,000 and total expenditures were $1 million – then the dependency quotient is 25 percent. This means that, if the top donors were to change priorities, the organization would have to replace a quarter of its budget.

* Cost of fundraising. The calculation takes a look at the average cost to net $1 across the entire organization. The lower the cost the more efficient the fundraising. The figure is calculated by dividing total fundraising expenses by the total fundraising net calculated earlier. If an organization spends $50,000 to raise a total of $150,000, then the cost of fundraising is 50 percent or $0.50 per dollar – ($50,000 / ($150,000 – $50,000)).

Tallying the numbers is only a small part of the battle and answers only get harder from there. There are tensions between these numbers, the report concedes. For instance, there is often an inverse relationship between dependency quotients and cost of fundraising — fundraising efforts to attract low- and mid-level donors often costing a pretty penny. The key is to strike a balance between risk and return.

“The organizations with the most strategic and sophisticated fundraising strategies work to build a robust program that balances the risks and rewards of different fundraising tactics through a blended portfolio or strategy,” according to the report. “They acknowledge that different fundraising tactics have different strengths, and work to build a cohesive strategy that matures and grows over time.”