As we said in Measuring Overall Fundraising Performance, net income is a better indicator of monies raised than gross income. Net income takes into account the costs associated with raising the funds while gross income doesn’t. You can increase net income by either increasing your revenues or decreasing your costs. In fact, the fastest and least expensive way to increase your income is by decreasing costs. This blog talks about the cost measurements that are important to monitor so that you can make data-driven decisions about increasing and decreasing costs.
Direct and Indirect Costs
When most fundraisers think about their fundraising costs, they think about their direct costs as opposed to their total costs. Total costs are made up of direct and indirect costs. Direct costs are those costs directly associated with the fundraising activities themselves. Indirect costs are all the other costs associated with implementing a development program, like fundraising staff and administrative support salaries, and a portion of rent, utilities, phone, office supplies, IT, accounting, human resources, and executive management expenses. For the most accurate accounting, take into account both direct and indirect, or total, costs.
If you don’t take into account total costs, you may lose money on a fundraising activity while thinking that you are making money. We see this all the time in grant writing. Nonprofit grant budgets often only list direct program costs, not mentioning any indirect costs at all. When the award comes, it only covers, then, a portion of the total organizational expenses used to implement the program. There is no money for indirect costs anywhere because they were not included in the program cost calculations. So, while it looks getting that grant is a good thing, if you don’t have a way to cover your indirect costs, you actually lose money.
To avoid situations like this in all your fundraising activities, always use total costs, not just direct costs, in your calculations. After all, your agency, no matter how small it is, incurs some sort of rent, utilities, phone, office supplies, IT, human resource, accounting, and executive management expenses. And those expenses need to be covered for your agency to grow. And agency growth means more mission will be met. And more mission being met is attractive to donors. And being attractive to donors means more money being donated. And more money being donated is what you work so hard to do. Start that upward cycle. Always calculate your total costs and base your metrics on them.
And, don’t forget opportunity costs. Having a staff person spend six months coordinating a special event that raises $40,000 not only eats up a lot of indirect costs, but also incurs the cost of what might have been done instead. Think about how much you might have raised if that staff person spent that time scheduling major gift calls, seeking business donations, or working with board members to cultivate major donors.
Costs to Raise $1
It takes money to make money. Fundraising involves an investment today that produces results tomorrow. Most often, you incur costs before you start realizing revenues, particularly staff costs. What kind of results are reasonable to expect from your investment? How do you know your fundraising staff are doing their job? What does the data tell you?
Generally speaking, to raise $1 through various activities it costs:
- Capital campaigns and major gifts, including labor: $0.10
- Grant writing, including labor: $0.20
- Direct mail renewal, including labor (with a 50 percent or better return rate): $0.20
- Special events, not including labor: $0.50
- Direct mail acquisition, including labor (with a 1 percent or better return rate): $1.25
To calculate your costs to raise $1, divide your fundraising expenses by your fundraising revenues. For example:
$300,000 fundraising expenses/$1,000,000 fundraising revenue = $0.30 to raise $1.
You want to calculate both your overall cost as well as your costs by fundraising channel. You want to know your overall costs so you can budget correctly. You want to know how much it is costs to raise $1 via your different fundraising activities so that you know which areas you can improve on. You will use gross revenues as your revenue number. For the most accurate results, use your total costs as your expenses number. If you use total costs as your expenses number and you can get your cost to raise $1 below the industry averages, you will be doing quite well. Both your direct and indirect costs will be accounted for. Just note that the average cost to raise $1 through special events of $0.50 does not include labor. If you include your labor costs in that calculation, your cost to raise $1 may well be over $1. In our experience, once you account for salaries, most special events lose money or, at best, break even.
If your cost to raise $1 is more than these averages, you want to work on streamlining your fundraising program and see where you can cut costs. Track your trends over time to monitor progress toward your goals. Remember, changes in your fundraising program and its procedures will probably take time.
Just a note on cutting costs: do not cut necessary expenses. Necessary expenses include things like ongoing training and administrative support. Studies prove that fundraisers who engage in continuing professional development raise more money than those who don’t. And good administrative support is crucial to maintaining tight fundraising operations. Yes, the fundraising professional can perform their own administrative tasks. But at what cost? Paying an administrative support professional to conduct the myriad of administrative tasks involved in fundraising generally costs less than paying a development professional to do the same thing.
If you are at or below the industry averages, then you want to maintain your current program. If your costs are where you want them to be, when you increase the amount of revenues you want to raise, then increase your expenses correspondingly.
Other cost metrics you should be aware of are your cost to acquire a donor and cost to retain a donor. Further break down those costs by fundraising channel. Then compare the costs to acquire a new donor and retain a current donor across the various fundraising activities. See what your least expensive way to acquire new donors is.
In Measuring Overall Fundraising Performance, we talked about making preliminary decisions about where to allocate resources to grow your donor base based on the number of donors per fundraising activity. Now you have more information. You can now also factor in the costs to recruit new donors per fundraising activity.
To calculate your cost to acquire a donor, divide the amount of expenses used to recruit new donors by the number of new donors. For example:
$45,000 new donor recruitment expenses/(4,200 donors this year – 4,000 donors last year) = $225 cost to recruit a new donor.
You calculate the costs of retaining a donor by dividing your normal fundraising expenses by the number of recurring donors. For example:
$120,000 recurring fundraising costs/1,880 recurring donors = $63.83 cost per recurring donor.
Of course, these costs are high because they include salaries and indirect expenses. Notice how much more expensive it is to recruit donors than retain donors, given the assumptions that this agency is spending a total of $165,000 on their fundraising program and they had 4,000 total donors last year and 4,200 total donors this year. You also know their donor acquisition rate is 5 percent, and their donor retention rate is 44.8 percent. We talked about donor acquisition in Donor Acquisition: How to Find People Interested in Giving to Your Nonprofit and donor retention in Donor Retention: Getting People to Give Again and Again.
Data Collection, Recordkeeping, and Reporting
To be able to run numbers like this, make sure your recordkeeping is accurate and up to date. Take the time to enter your financial as well as donor data. Run the numbers monthly. Account for your total expenses, not just your direct ones. Find out how much it really costs to raise $1. Benchmark your fundraising performance to averages and see where you fall. See what fundraising channels are the least expensive for you to implement. Budget realistically, accounting for your nonprofit’s current expenses. Allow time for improvement. Create realistic fundraising goals based on the ratio of revenue to costs. Make sure your team has enough resources to do what you want them to do. And then evaluate your and your team’s performance using objective criteria based on the data. Support your team and stop the 14-month revolving door.
Bringing It Together
When you calculate your costs, use your total costs as opposed to only you direct costs. Benchmark your and your team’s performance against industry averages. Allow a reasonable amount of time for improvement. When you cut costs, remember professional development and administrative expenses are often worth their investment. Research how much it costs your nonprofit to recruit and retain donors. Allocate resources so that you realize the most amount of money using the least amount of resources. Create a budget with enough resources for you and your team to reach your goals. Base your decisions on objective data.
Run your own numbers and see your own results. Find out what it costs you to recruit as opposed to retain a donor. Then leave a comment for me and tell me how you’re doing.