March 14, 2017
Fundraising is at the core of most nonprofit organizations. It can be a challenging endeavor deciding when and how to raise the funds your organization needs to meet both current and future needs. Even more challenging can be determining whether a chosen method of fundraising is effective in creating sustainability for the organization. So how do you measure whether your efforts are bearing enough fruit to merit continuing them?
Often, we evaluate the success of a fundraiser by looking at our net income. In the nonprofit world, net income is the ultimate prize, which can make costs look like the enemy. After all, the goal is to make money, not spend it. But, remember that old adage “It takes money to make money.” It applies to nonprofits too. What if we instead looked at the costs of fundraising as making investments in the sustainability of our organization’s mission? An investment strategy view of fundraising requires a more holistic view than just net income, and alternative metrics such as the dependency quotient or the cost of fundraising can be extremely helpful in determining the effectiveness of your fundraising efforts.
Although not widely used, dependency quotients can be a good indicator of your organization’s vulnerability to changes in donor giving. The dependency quotient is found by dividing the sum of contributions from your organization’s top five donors by total expenditures for the same period. For example, if the top five donors gave $500,000 in the last three years, and the organization’s expenses were $1,000,000, your organization is 50% dependent on those five donors.
The cost of fundraising is what your organization invests to make $1.00 and is determined by dividing the total cost of the fundraiser by the total dollar amount raised. For example, if your organization spends $50,000 on an event that brings in $200,000, the cost of fundraising is 25%. In other words, you have to spend $0.25 to make $1.00.
In addition to applying these metrics to direct costs, your organization should also consider indirect costs, such as staff and volunteer time and the opportunity cost of pursuing one method of fundraising over another. Mail campaigns can be costly upfront and time consuming to build, but can potentially create a strong donor base that is less susceptible to an ever-changing economy. On the other hand, sponsorship may be less costly but creates a higher dependency on a smaller number of donors. Like any investment strategy, these pros and cons must be carefully weighed to determine what is best for your organization.
Many nonprofits choose to diversify their fundraising “portfolio” to mitigate risk and maximize returns. How your organization chooses to raise money will depend on your mission and the type of support your organization needs. While evaluating the success of your efforts can be tricky, the sustainability of your organization will be the ultimate litmus in determining whether your fundraising is effective.