Why Fundraising Ratios are Crap for Decision Making
As part of the Principles of Fundraising class at North Park University’s School of Business and Nonprofit Management, students were asked, in groups, to discuss percent fundraising costs in a Wiki assignment. Karen Alvord and Seth Seward did such a great job explaining it, I wanted to share it with you all.
What is the concept of percent fundraising costs?
Percent fundraising costs depict the relationship between an organization’s fundraising expenses and the amount of total revenues. (McLean & Coffman, 2004). A percentage of fundraising costs is arrived at by dividing the fundraising expenses by the total funds raised/earned.
|Examples of Percent Fundraising Costs|
|Total Fundraising Expenses||Total Revenues||Percent Fundraising Costs|
The concept of using percent fundraising costs to determine fundraising effectiveness is generally considered to have little usefulness in determining the actual effectiveness of an organization in achieving its mission. However, high fundraising cost percentages may be a red flag signally unacceptable fundraising practices. It is one factor, among many, that should be considered when evaluating the appropriateness and effectiveness of an organization’s fundraising practices.
Reasons why you should not use percent fundraising cost ratios in decision-making for fundraising?
Percent fundraising cost ratios can be very misleading and are generally considered one of the least useful of the ratios. Reasons why they are not recommended include:
Percent Fundraising Costs are over simplified and do not take into consideration any number of factors which could affect fundraising costs from year to year. (Afpnet.org, 2012)
- There is often a delay in obtaining major gifts and so there may be a misalignment of the time periods for incurred expenses and gifts received. (Lindahl, 2008)
- Estate gifts are significantly delayed resulting in the same issue as above (#2) (Lindahl, 2008)
- Routine gifts may actually cause the percent to be low. (Lindahl, 2008)
- If you base a fundraising decision on past fundraising successes and percentage fundraising costs, it is not guaranteed that the next or same fundraiser will produce the same results. Some of the external factors that made the event a success can change resulting in better or poorer outcomes.
In addition, for a donor considering investing in an organization, there are a variety of reasons why using percent fundraising cost information may not be the most reliable method to use, including:
- About 60% of public charities that file Form 990 report no fundraising expense.
- Accounting practices are unreliable as well. Discrepant ratios may actually be a result of differing accounting methodologies.
- Fundraising costs are highly influenced by the unique circumstances of the organization. For example organizations that receive a large amount of foundation or government support may have less fundraising expense than an organization that raises money through events and individual donor relationships.
- It is expected that fundraising costs are influenced by industry specifics. For example, museums generally have higher overhead and fundraising costs than food banks, so comparing their fundraising cost percentages without consideration of industry norms can be ineffective in determining which organization is more cost efficient.
Nonprofit organizations exist to provide a service and to improve the lives of those it serves. Mission performance is a much better indicator of an organization’s efficiency than percent fundraising cost ratios. When evaluating an organization’s effectiveness and the actual return on investment, it is necessary to understand what the organization’s purpose is and how effectively it achieves its goals. If an organization has less fundraising cost percentages, but does not achieve the same impact in its community as its “competitors” with similar size, scope and program goals, then it is not necessarily the better choice for investment.
Why does the public insist on using this ratio in deciding which organization to support?
Thirty-six percent of the public strongly agrees or mostly agrees with the statement that charities are wasteful. (Independent Sector’s Giving and Volunteering Survey, 1996, as referenced in Bowman, 2006. p. 6) Examples of financial abuses within nonprofit organizations have created a level of scrutiny and skepticism in the public. Donors want to know that when they invest in a charitable cause that the majority of these dollars will be used for direct service to support the agency’s mission, and not be wasted on excessive administrative overhead. Knowing how many dollars go directly to the program compared to fundraising or overhead is important to most donors. Donor watchdog groups advocate the use of financial ratios as a means of evaluating charities and screening out organizations that are inappropriately using their funds or have excessive fundraising and administrative overhead costs.
While cost efficiency is something to be mindful of in the nonprofit sector, some level of administrative overhead is reasonable and necessary to operate an effective organization. It is equally important that the nonrprofit sector work to educate the public on the necessity and reasonableness of administrative and fundraising costs in their pursuit of accomplishing their missions. Administration is a necessary cost for all business, whether profit or nonprofit, and too little administrative overhead can lead to ineffective leadership, oversight, accountability and poor program outcomes. As the nonprofit sector improves in the consistency and accuracy of reporting of such expenses, along with public education, this could lead to increased trust and understanding for the need for adequate overhead to run a quality program.
References and Further Reading:
- CRA Calls for Comments on Fundraising Cost Guidelines on afpnet.org
- Principles of Fundraising: Theory and Practice by Wesley Lindahl
- How Do We Rate Charities’ Financial Health? on Charity Navigator
- Why Ratios Aren’t the Last Word on Guidestar
This post was submitted by on behalf of graduate students in the North Park University School of Business and Nonprofit Management as part of the Principles of Fundraising class. Learn more about North Park and the SBNM here. Read other posts from SBNM students here.