Over the years, I have developed a spreadsheet model to help me calculate the return on investment, in real terms, on campaigns to recruit new donors whether the supporters recruited give one-off gifts, regular gifts or both. I find it very useful and it may be useful to others so I have made it available to download online. You can find it at www.tobinaldrich.com.
Let me know if you find it useful.
Saturday, November 10, 2007
Monday, November 5, 2007
What's wrong with fundraising ratios?
The cost of fundraising and its effectiveness are issues of increasing importance in today’s non-profit sector. There is increasing public scrutiny of charities and how they spend donors’ money while the parallel extension of commercial business practices into the non profit sector has brought with it an increasing interest in benchmarking and other performance measurement tools.
Measuring fundraising effectiveness properly is thus critical to organisations like Concern on two fronts. From a financial stewardship perspective, we need to ensure that our fundraising is as efficient as possible. From a public relations perspective we need to be able to demonstrate this to our donors and our other stakeholders.
There are many problems to be overcome in objectively judging our performance relative to other non-profit organisations.
Fundraising ratios
The most obvious method of judging fundraising efficiency is the ratio of fundraising expenditure either to total income or to total expenditure. This is the figure that charities in the UK and Ireland tend to use when communicating with the general public.
Charities use this indicator because it portrays their performance in the best light. The majority of charities obtain a large proportion of their income from government or other institutional sources, this is money which is obtained free of fundraising costs (or those costs which are incurred are not reported as fundraising costs) and thus fundraising costs as an overall proportion of the total are significantly reduced.
If individual donors wish to know how much of their donation is likely to go to our direct charitable work, clearly the total income ratio sounds much better but is also completely misleading.
However, even the ratio which measures fundraising expenditure as a proportion of total income (henceforth called CFR: cost of fundraising ratio) is misleading. Many charities allocate sometimes a significant proportion of their fundraising expenditure to cahritiable expenditure in their audited accounts. This is an entirely legal measure, reflecting the fact that fundraising and publicity communications have an education content as well as a fundraising message. Each charity decides how much to much to allocate to charitable spend itself (subject to approval by auditors) and this can seriously under-represent real fundraising expenditure.
There are other problems with using a simple overall ratio for judging fundraising efficiency. All charities do not raise money in the same way. Charities whose basic income sources are from volunteer activity, such as Church based organisations will have lower overall fundraising ratios than charities whose main sources of funding are from higher cost activities such as direct marketing.
Charities with significant legacy income will also show lower fundraising ratios than charities which lack this income source. This favours the older charities whose legacy income reflects their historic position rather than current fundraising activities. The simple mechanics of this income source mean that it is unlikely any charity which has been established in the last thirty years will have any significant legacy income.
All charities are not equal and all causes are not equally popular. For example, the cost of fundraising for emergency appeals such as the 2005 Asian Tsunami is a fraction of the cost charities incur raising money for long-term development projects. How is this to be factored in?
Crude ratios also do nor reflect the extent to which charities may be investing or not in fundraising. Charities' campaigns to recruit regular givers is an example of an activity with a high year one cost which will produce returns over many years. On a year one basis, this activity has a terrible ratio, with costs at nearly 100% of fundraising income. But over 5-7 years, these costs may account for only around 20% of income.
There have been attempts to derive more meaningful measurements of fundraising performance by type of activity. The well established Fund Ratios survey run by the Centre for Interfirm Comparison in the UK currently measures the performance of 35 major charities across the range of their fundraising activities.
There are some problems with the resulting analysis, mainly due to the different ways charities classify their activities and some failures by the participating charities to provide accurate information. However, this information is used below.
What is an acceptable ratio?
The above discussion demonstrates some of the problems with using a simple cost of fundraising ratio to determine an organisation’s efficiency, Whatever its drawbacks, however, an overall ratio is increasingly being used by outside organisations to benchmark charity performance.
An increasing number of (self-appointed) charity watchdog organisations are offering benchmarking of charities in the USA. An example is the American Institute of Philanthropy (http://www.charitywatch.org/) which offers an A to F charity rating, based largely on the proportion of money spent directly on programmes (it cites 60% as a minimum) and proportion of fundraising income spent of fundraising. This organisation specifies that a ratio of 35% of fundraised income being spent on fundraising is the highest that is acceptable. It offers its highest ratings, however, to organisations who do not spend more than 25% of their fundraised income on fundraising.
The Better Business Bureau Wise Giving Alliance (http://www.give.org/) set of charity standards has a minimum programme spend figure of 65% and a maximum acceptable fundraising ratio of 35% of related contributions.
The figure of 25% is used by a number of other watchdog internet sites and is quoted widely anecdotally as a reasonable percentage to spend on fundraising. Some US states impose this as a requirement for new non profit registrations. There is no research or analysis behind this choice of figure.
Research has been conducted in the UK as to what constitutes an acceptable cost of fundraising and what donors (and non donors) think that charities actually spend. This has demonstrated that people are confused about the issue and, generally, think charities spend more on fundraising than they actually do.
In March 2003, research commissioned by the Future Foundation showed that 44% of the general public thought that charities should spend 10% or less of their income on fundraising (no distinction was made between total income and fundraised income), 26% thought that 11%-20% was acceptable, 9% thought 21-30% and 21% were prepared to accept ratios higher than 30%. Interestingly the public think that charities actually spend much more than this, only 10% think that charities spend 10% or less, 18% think 11-20%, 21% think 21-30% and a huge 51% think charities spend over 30% of their income on fundraising. 15% of people think charities spend over 50% of their income on fundraising.
Donors to charities are less accepting of high fundraising costs than non donors but are no less likely to think that charities spend more than they do. Women and the young are more accepting of higher fundraising costs than the old.
The public are much more likely to accept charities spending money on fundraising than on administration. There was a similar gap between what people thought charities should spend on administration and the perception of what they actually spent.
The Directory of Social Change published a “Guide to the Major Charities” in the UK in 2002. This provides a reasonable degree of information about many of the major charities and includes a discussion of each charity’s fundraising ration (measured as a percentage of fundraising costs against fundraising income).The Guide uses the following categories to classify fundraising costs:
Very low Under 10%
Low 11-20%
No comment 21% to 30%
High 31% to 40%
Very high Over 40%
Overall, therefore, there is very little consensus as to what constitutes an acceptable fundraising ratio. There is widespread confusion, often abetted by charities themselves as to what fundraising ratios actually measure. Some bodies in the USA and the UK are attempting to use ratios as a method of judging charity effectiveness but the attempt is being resisted by many people in the sector.
Measuring fundraising effectiveness properly is thus critical to organisations like Concern on two fronts. From a financial stewardship perspective, we need to ensure that our fundraising is as efficient as possible. From a public relations perspective we need to be able to demonstrate this to our donors and our other stakeholders.
There are many problems to be overcome in objectively judging our performance relative to other non-profit organisations.
Fundraising ratios
The most obvious method of judging fundraising efficiency is the ratio of fundraising expenditure either to total income or to total expenditure. This is the figure that charities in the UK and Ireland tend to use when communicating with the general public.
Charities use this indicator because it portrays their performance in the best light. The majority of charities obtain a large proportion of their income from government or other institutional sources, this is money which is obtained free of fundraising costs (or those costs which are incurred are not reported as fundraising costs) and thus fundraising costs as an overall proportion of the total are significantly reduced.
If individual donors wish to know how much of their donation is likely to go to our direct charitable work, clearly the total income ratio sounds much better but is also completely misleading.
However, even the ratio which measures fundraising expenditure as a proportion of total income (henceforth called CFR: cost of fundraising ratio) is misleading. Many charities allocate sometimes a significant proportion of their fundraising expenditure to cahritiable expenditure in their audited accounts. This is an entirely legal measure, reflecting the fact that fundraising and publicity communications have an education content as well as a fundraising message. Each charity decides how much to much to allocate to charitable spend itself (subject to approval by auditors) and this can seriously under-represent real fundraising expenditure.
There are other problems with using a simple overall ratio for judging fundraising efficiency. All charities do not raise money in the same way. Charities whose basic income sources are from volunteer activity, such as Church based organisations will have lower overall fundraising ratios than charities whose main sources of funding are from higher cost activities such as direct marketing.
Charities with significant legacy income will also show lower fundraising ratios than charities which lack this income source. This favours the older charities whose legacy income reflects their historic position rather than current fundraising activities. The simple mechanics of this income source mean that it is unlikely any charity which has been established in the last thirty years will have any significant legacy income.
All charities are not equal and all causes are not equally popular. For example, the cost of fundraising for emergency appeals such as the 2005 Asian Tsunami is a fraction of the cost charities incur raising money for long-term development projects. How is this to be factored in?
Crude ratios also do nor reflect the extent to which charities may be investing or not in fundraising. Charities' campaigns to recruit regular givers is an example of an activity with a high year one cost which will produce returns over many years. On a year one basis, this activity has a terrible ratio, with costs at nearly 100% of fundraising income. But over 5-7 years, these costs may account for only around 20% of income.
There have been attempts to derive more meaningful measurements of fundraising performance by type of activity. The well established Fund Ratios survey run by the Centre for Interfirm Comparison in the UK currently measures the performance of 35 major charities across the range of their fundraising activities.
There are some problems with the resulting analysis, mainly due to the different ways charities classify their activities and some failures by the participating charities to provide accurate information. However, this information is used below.
What is an acceptable ratio?
The above discussion demonstrates some of the problems with using a simple cost of fundraising ratio to determine an organisation’s efficiency, Whatever its drawbacks, however, an overall ratio is increasingly being used by outside organisations to benchmark charity performance.
An increasing number of (self-appointed) charity watchdog organisations are offering benchmarking of charities in the USA. An example is the American Institute of Philanthropy (http://www.charitywatch.org/) which offers an A to F charity rating, based largely on the proportion of money spent directly on programmes (it cites 60% as a minimum) and proportion of fundraising income spent of fundraising. This organisation specifies that a ratio of 35% of fundraised income being spent on fundraising is the highest that is acceptable. It offers its highest ratings, however, to organisations who do not spend more than 25% of their fundraised income on fundraising.
The Better Business Bureau Wise Giving Alliance (http://www.give.org/) set of charity standards has a minimum programme spend figure of 65% and a maximum acceptable fundraising ratio of 35% of related contributions.
The figure of 25% is used by a number of other watchdog internet sites and is quoted widely anecdotally as a reasonable percentage to spend on fundraising. Some US states impose this as a requirement for new non profit registrations. There is no research or analysis behind this choice of figure.
Research has been conducted in the UK as to what constitutes an acceptable cost of fundraising and what donors (and non donors) think that charities actually spend. This has demonstrated that people are confused about the issue and, generally, think charities spend more on fundraising than they actually do.
In March 2003, research commissioned by the Future Foundation showed that 44% of the general public thought that charities should spend 10% or less of their income on fundraising (no distinction was made between total income and fundraised income), 26% thought that 11%-20% was acceptable, 9% thought 21-30% and 21% were prepared to accept ratios higher than 30%. Interestingly the public think that charities actually spend much more than this, only 10% think that charities spend 10% or less, 18% think 11-20%, 21% think 21-30% and a huge 51% think charities spend over 30% of their income on fundraising. 15% of people think charities spend over 50% of their income on fundraising.
Donors to charities are less accepting of high fundraising costs than non donors but are no less likely to think that charities spend more than they do. Women and the young are more accepting of higher fundraising costs than the old.
The public are much more likely to accept charities spending money on fundraising than on administration. There was a similar gap between what people thought charities should spend on administration and the perception of what they actually spent.
The Directory of Social Change published a “Guide to the Major Charities” in the UK in 2002. This provides a reasonable degree of information about many of the major charities and includes a discussion of each charity’s fundraising ration (measured as a percentage of fundraising costs against fundraising income).The Guide uses the following categories to classify fundraising costs:
Very low Under 10%
Low 11-20%
No comment 21% to 30%
High 31% to 40%
Very high Over 40%
Overall, therefore, there is very little consensus as to what constitutes an acceptable fundraising ratio. There is widespread confusion, often abetted by charities themselves as to what fundraising ratios actually measure. Some bodies in the USA and the UK are attempting to use ratios as a method of judging charity effectiveness but the attempt is being resisted by many people in the sector.
Some initial resources
If you are interestted in measuring the effectiveness of your fundraising, here are some useful places to start. Some theory is always useful. I would start with "Fundraising Management: Analysis, Planning and Practice" by Adrian Sargeant and Elaine Jay http://www.charityfundraising.org/Books.htm, this is a really good basic primer on fundraising management.
You will also want to look at what other organisations in your sector do and what results they get. Look at their annual reports (if they are a charity registered in England & Wales, their annual reports will be downlaodable from the charity commission website http://www.charity-commission.gov.uk/registeredcharities/first.asp. For a US non-profit, Guidestar (www.guidestar.org) is the starting point.
I will cover the vexed question of fundraising ratios in a later post but the most comprehensive coparative analysis of the cost-effectiveness of various forms of fundraising in the UK is the annual FundRatios study. A summary of the 2005-06 results is at
http://www.cifc.co.uk/Fundratios06.html
You will also want to look at what other organisations in your sector do and what results they get. Look at their annual reports (if they are a charity registered in England & Wales, their annual reports will be downlaodable from the charity commission website http://www.charity-commission.gov.uk/registeredcharities/first.asp. For a US non-profit, Guidestar (www.guidestar.org) is the starting point.
I will cover the vexed question of fundraising ratios in a later post but the most comprehensive coparative analysis of the cost-effectiveness of various forms of fundraising in the UK is the annual FundRatios study. A summary of the 2005-06 results is at
http://www.cifc.co.uk/Fundratios06.html
What's this?
Welcome. I am a UK based fundraiser, working for quite a few years with a number of non-profits including domestic and international causes, fundraising in the UK, Ireland and internationally.
During the course of my career, one of the recurring themes I have encountered has been the difficulty fundraisers face in measuring the effectiveness of what we do. In theory, this is easy, we count the money we have raised. But how do we know if that is good or not? If I raise £1 million but spend £500,000 to do so is that better than raising £500,000 but only spending £100,000? In the first case, you have more money (£500K net compared with £400K) so that's good right? Except that you have spent 50p in the pound of what you have raised on fundraising, compared to 20p in the pound in the second example. So which is better?
Fundraisers are a great bunch of people, on the whole, friendly, enthusiastic, often inspirational. But most of them aren't great at measurement. The purpose of this blog is to share some tools and information I have gathered over the years that might help with the problem of measuring fundraising performance. Hopefully, it will be useful.
During the course of my career, one of the recurring themes I have encountered has been the difficulty fundraisers face in measuring the effectiveness of what we do. In theory, this is easy, we count the money we have raised. But how do we know if that is good or not? If I raise £1 million but spend £500,000 to do so is that better than raising £500,000 but only spending £100,000? In the first case, you have more money (£500K net compared with £400K) so that's good right? Except that you have spent 50p in the pound of what you have raised on fundraising, compared to 20p in the pound in the second example. So which is better?
Fundraisers are a great bunch of people, on the whole, friendly, enthusiastic, often inspirational. But most of them aren't great at measurement. The purpose of this blog is to share some tools and information I have gathered over the years that might help with the problem of measuring fundraising performance. Hopefully, it will be useful.
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