‘Tis the season of board meetings and budget reviews for those organizations with fiscal years beginning in July.

So, there’s no better time to offer up this Agitator Board Meeting Swipe File on Fundraising Costs and Investment in Fundraising.

Here’s a brief compilation of resources and advice that may come in handy as you explain to your board, CEO and CFO the issues of ‘overhead’, ‘costs’, ‘investment’,  ‘fundraiser pay’, and other frequently raised questions about the costs and returns in fundraising.

On Overhead…

In a NonProfitPRO post titled 4 Philanthropy Myths That Need Busting, Allison White of Graham Pelton pinpoints two ‘myths’  that need exploding: 1) ‘The Less Overhead, the Better the Nonprofit’, and 2) ‘Nonprofit Professionals Shouldn’t Be Paid Like Other Professionals’.

This all-too-prevalent mindset is reflected in this video from the National Association of Nonprofit Organizations & Executives (NANONE.org).

As Allison points out in her post “praising nonprofits for lean overhead numbers sends the wrong message to donors, nonprofit leaders and others: That running a lean operation is all that matters.” And…efforts to hold down fundraisers’ pay creates a major problem in the sector: “Talented professionals avoid the sector and turnover issues persist.”

On Cost Ratios…

Ken Burnett in his post The ‘Less Cost is Best’ Fallacy gives six reasons why adhering to rigid cost ratios is wrong-headed, abbreviated a bit here …

The question is wrong. What is a good profit percentage for a business? …very few businesses work on a ratio better than two to one. Those coming even close to that would be laughing all the way to their bank. Businesses, of course, grab any profits they can, maximizing the net while exploiting sensible opportunities, minimizing costs and prudently managing appropriate risks. So should we.

The arbitrary fixed ratio model isn’t found anywhere else. It’s hard to imagine any business that could afford to say, ‘We won’t pursue any business activity unless it produces a return of 3:1.’ Even if they could, they wouldn’t, because businesses like to maximize net income.

It discourages risk and innovation. Obviously, if overall costs must fit inside a fixed ratio no one is going to try anything new or unproved. As all fundraising declines over time, this is a recipe for disaster.

It’s staggeringly unsophisticated. Being guided by an average ratio is like judging a person’s … ability to give to our appeal by the loose change they have in their pockets.

The public believes spending on admin is wrong. Why have we allowed such a fallacy? Obviously, if a charity isn’t properly administered, any donations it receives will most likely be wasted.

The public still views fundraising as a cost, not an investment. Yet, as Ken puts it, “good fundraising averagely generates a return that quickly outstrips market investments, by far. Why are the public (and trustee boards) happy to see charity reserves invested in stocks and shares that averagely return three per cent or thereabouts, while not investing sufficiently in fundraising, which with almost cast-iron certainty will bring in returns ten times better? Often much more. And secure their organization’s future by building a substantial donor base. Many donors balk at an average fundraising cost as high as one-third of the money raised. Yet I don’t know any donor who, when told, ‘Give me £1.00 and I’ll quickly turn it into £3.00 for the cause,’ wouldn’t say, ‘Go for it!'”

As usual with Ken, you should really read his entire post.

Ken’s last point is the huge perception obstacle to overcome with the public and with Boards. It’s the main issue Dan Pallotta addresses in his famous TED talk: The way we think about charity is dead wrong.

AND… for more insight into the fallacy of cost/income rations, see veteran UK fundraiser Matthew Sherrington’s article, Apples and Pears: The Curse of the ROI Fundraising Ratio, which explains why Return on Investment (ROI) should not be a goal that governs fundraising strategy.

On Investment…

Too many fundraisers and their boards simply don’t understand the value and necessity of money and how to employ it wisely in building, growing and sustaining a base of donors.

There’s no question in my mind that a great deal of the furor over ‘fundraising costs’ on the part of the regulators, the press, and many nonprofit boards stems from near absolute ignorance.

Ignorance about what ‘acquisition’ of a donor or a gift is, how it should be measured, and when or whether its costs and techniques should be considered acceptable.

Because the acquisition of new donors is essential to maintaining and growing virtually every organization, most fundraisers need to get much better at both understanding and explaining this essential process to their boards and top management. The alternative is continued ignorance on the part of the watchdogs, implied scandal on the part of the press, panic and finger pointing in the boardroom, and angry, turned-off donors.

[See The Agitator post Wanted: An Investment Mindset for more details and a terrific example of why the metric Lifetime Value is so important.]

So where do we get the money to invest? Most organizations have reserve funds and older organizations have endowment funds. It’s almost a dereliction of a board’s fiduciary responsibility to not invest some of those reserves judiciously in donor recruitment and development. An investment that would yield an annual rate of return for most organizations of 20%, 30% or even more, as opposed to the 2%-5% that’s typical of parking the funds in Certificates of Deposit.

For more on this point see The Agitator ‘s The Investment Paradox. It features a study by Giles Pegram CBE  showing how much of a greater return UK charities received by investing in fundraising as opposed to the stock market.

It’s time boards and investment committees wake up to the wisdom of investing in fundraising.

Resources for Dealing with the Issues of Costs and Investment…

There are lots of goodies you can share with your board, management and colleagues.  Here’s a summary:

• For a detailed treatment and recommendations on how organizations should approach the issue of fundraising costs, I recommend you explore the research and guidelines compiled by The Commission on the Donor Experience, its Section on Fundraising investment and the accompanying white paper, Being honest and telling the truth well about fundraising costs by Giles Pegram, Allan Freeman, Angela Cuff, David Ainsworth and Andrew O’Brien
• See The Agitator’s How to Talk About Fundraising Costs that contains Questions for Which You Should Prepare Answers. 

 Whether the ‘cost’ and ‘overhead’ questions are incisive or idiotic, and whether they come from within or outside your nonprofit, you should have answers to:

• • • “Why not just raise money online?”
    • “What happened to your fourth star on Charity Navigator?”
    • “I think your overhead costs are too high.”
    • “A disgruntled former employee claims your telemarketing partner got most of the money from a telefundraising campaign. You spent $50,000 on it, but it only brought in $40,000.”

You should be able to answer questions like these quickly and clearly for donors and the media.

• Boards and top management sometimes want ‘metrics’. If your board is into that you might find this Agitator post on vanity metrics helpful in dealing with nonsense numbers. And this post Focus on Fundraising Metrics That Really Matter.

Have a good board meeting. AND…please share any tips you have for dealing with cost, overhead and investment issues.

Roger