By Janice Boyle
Last week, we talked about the good, the bad and the ugly of using the detailed fundraising budget as a primary fundraising metric. The responses and feedback I received were enough to convince me I am not alone in experiencing the counterproductive pull of a metric being applied with good intentions, but ultimately negative results.
Today, we are going to cover another couple of metrics that are ubiquitous in our industry, and just as commonly misapplied.
Number 2: Gross Revenue
In the business world, gross revenue tells you a lot about a company relative to its competitors. Growth of gross revenue is seen as a sign of corporate health and prosperity. That business lens is often applied to non-profits, where it is perceived that a charity with the larger balance sheet is somehow in better shape. Also, if a charity isn’t growing, the angst around the board and executive table inevitably appears, asking why not? The challenge with applying that business lens to charities is that by definition, the goal of a non-profit is fulfilling its mission, not growing its balance sheets. And the goal of business is to make money. That being said, the charitable sector struggles with producing useful, understandable, and concrete measurements that demonstrate how effectively they are achieving their missions. And in the absence of that, boards and senior executives turn to what is readily available to judge the merits of annual activities, the financial statements.
In fact for all non-profits, money isn’t even mentioned in the mission statement. I always find it perplexing when a charity, as part of their strategic plan, has a financial goal that is a standalone pillar of their plan. I have always considered revenue targets strictly an operational requirement to meet the needs of the strategic plan, not a strategy in and of itself.
As an example, in one of my roles, we were raising approximately $9 ½ million dollars annually. Our expenses were approximately $3 ½ million. So we had $6 million to spend on our mission. Another branch of the same organization was raising significantly more, approximately $12 million a year. Our board wanted to know how we could work to achieve that level of gross revenue. However, when you looked at their expenses, they were approximately $6 million. Now this wasn’t because they were less efficient or effective than our branch. They just raised funds in different ways, some of which were more expensive. They raised significantly more through special events and we raised significantly more through monthly giving and major gifts. At the end of the day, both of us were raising $6 million towards our mission. Which branch, in your opinion, was doing better? You can see how clearly using a different metric gives you an entirely different answer, which begs the question, which one should you be using?
But one of the challenges of looking at gross revenue and total expenses as a whole leads you to another problematic metric.
Number 3: Cost/$ Raised
When calculated across all fundraising activities of an organization, this number is interesting, but not in any way useful. It is also the metric used most frequently by the general public to judge whether or not a charity is making responsible use of their donations. It is this fact in particular that drives me a little (a lot) crazy, because even if a charity is efficiently raising money, this metric says nothing about how well they are achieving the mission. It’s another example of people using the available information to inform their choices rather than the right information.
So, let’s take an example, looking at that $9 ½ million I referred to earlier. It was made up of prospecting activities, direct mail, monthly giving, major gifts, corporate and foundation giving, and 3rd party events. At one point, I requested the industry standards for cost/$ raised by fundraising method from AFP (Association of Fundraising Professionals) and compared it to what we had.
|Fundraising Method||Industry Standard||Our results|
|Direct mail – donors||$0.20-0.25/$||$0.19|
|Direct mail – prospects||$1.00-1.75/$||$0.80-0.90|
|Monthly donors||Not provided||$0.03|
|Special events||$0.50-$0.75||Not applicable|
So, according to industry standards, we were doing quite well. And when a donor called and asked us what our fundraising expenses were, the short answer, which varied a little each year, was between $0.30 and $0.34 per dollar raised. However, I did get into the habit, when a donor called asking about our fundraising expenses to give them a different response. “I’m really glad you asked me that. Do you have a few minutes? There is a bit more to explain than the overall average tells you.” Invariably, they would say yes, and it was a great opportunity to educate our donors on how it all works.
But let’s move from the general public to the perceptions of a senior volunteer. I had the pleasure of working with Dr. Geoffrey Ballard, the founder of Ballard Power, and his wife Sheila. They were regular volunteers, and I saw them on a weekly basis. Dr. Ballard was interested in our financials and had questions about the cost of our fundraising methods. He zeroed in on the direct mail, which looked to him like an opportunity to cut costs, because it was a material expense. So we spent some time going through each fundraising stream, how much revenue it generated relative to cost, how we compared to industry standards, and at first I thought that I had convinced him that we were on the right track. But I had not. We finished the meeting with him unconvinced, and on the drive home (most of my inspiration happens on my commute) I thought about how I had presented the information. It wasn’t until the drive in the next morning that I realized how I might better make my point.
I saw him again the following week during his volunteer shift, and we began chatting. I told him I had a question for him that I wanted him to think about. “So right now we have a profit margin of 80% for our direct mail donor campaigns. How much profit does Ballard Power generate annually?” The answer of course was none. It triggered a great discussion on the similarities and differences between fundraising and business, and in the end, we were on the same page (and I learned more about hydrogen fuel cells than I ever thought I would).
It’s been many years since I looked it up, but I put together a slide for the board on average profit margins for certain business sectors. It was eye opening for all of us to compare a business sector that had a profit margin under 10% and was considered successful and well managed next to direct mail at 80% and routinely questioned as too expensive. It really is all about perspective. And just as profit margins vary in the life cycle of a business, the life-cycle of the organization affects the expected cost/$ raised of its fundraising.
Another helpful analogy to explain the cost of fundraising to those in the financial sector is to compare it to (and I might be butchering the terminology, but here it goes) the mix/rate of an investment portfolio. A given portfolio will have an overall rate of return, but it will have a mix of investments that all have different rates of return. They will be chosen as part of an overall investment strategy, each with a specific place and purpose, but just like in fundraising, you wouldn’t know it if you didn’t peek under the hood.
I think helping donors to peek under our fundraising hoods, and understand more about the realistic and appropriate cost of fundraising will go a long way towards advancing the ability of non-profits to talk less about money and more about mission.
I was at a conference a few years ago, and attended a session where a philanthropist was going to share how she decided to give a significant gift to a particular charity. She first talked about how important a low fundraising and administrative cost was to her, because it was an indication of “efficiency” and as a responsible donor, she wanted as much of her gift to go to the mission as possible. So far, this was not news. Then she described how she would give “test” gifts of $25 to several shortlisted charities and see how they treated her (you can call them her donor service metrics).
- Was she phoned and thanked? Was it the Executive Director?
- Did she receive her tax receipt and thank you letter in less than a week? Was her name and address correct?
- Was she invited to tour the charity?
- Was she invited to a donor recognition event?
- Was she listed in the annual report?
- Did they respect her wishes on how often she wanted to be contacted?
As I was sitting there listening, I was adding in my head the people, technology, infrastructure, systems, office space, heat, light, rent, internet, phone lines, etc. to provide that level of donor service for all donors in a year who give $25 or more. Of course it’s doable, but I also know any organization that was spending enough to achieve that would never satisfy its fundraising and administrative cost threshold. Her criteria weren’t difficult to meet. They were impossible. Another to add to my list of things that make you go “hmmmmm”.
When I started this article, I had a neat little outline and figured I could put it together in a couple of hours, but as you can see, it turns out I had more to share than I thought. Before this one gets to long, I’m going to wrap it up for now. Next week, I’ll be talking about another challenging facet of using cost/$ raised as a primary metric – the tension between looking at cost or looking at ROI. My working title at the moment is The Fundraiser vs The Accountant. And I promise, I will get to the list of metrics I have found most helpful. Stay tuned.
I’m also interested in hearing from you. Have you come across an interesting or perplexing metric in your work? I’d love to hear your stories. And let me assure you, you are not crazy, but sometimes the goals we are given are.
Janice Boyle started her fundraising career as a student caller for UBC’s annual fund. Her career has spanned the social services, education and healthcare sectors over the last 20 years in senior leadership roles. She is passionate about improving her local community, with her specialties in non-profit leadership, supportive infrastructure, and team building. She was recognized in 2011 with the Association of Fundraising Professionals’ Outstanding Professional Fundraiser Award as well as the Business in Vancouver’s 40 Under 40 Outstanding Achievement Award in 2002. She can be contacted at Janice.firstname.lastname@example.org