Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

June 12, 2013

Calculating the Cost of Fundraising


Nell Edgington

It seems that almost every nonprofit I talk to either has or would like to have some sort of fundraising event. There is a rampant misconception that a successful fundraising event can be the answer to a nonprofit's money woes. That is sadly not the case.

Events do not make money for nonprofits. Sure, they might generate some gross revenue, but when you look at the net revenue raised and the cost to raise a dollar, they break even if you are luck and lose money if you are not. And those two calculations, net revenue and cost to raise a dollar, if employed by more nonprofits, could transform how effective fundraising could be for the sector.

At the risk of boring you with the math, let me give you an example. Let's pretend that a nonprofit organization with a $500,000 annual budget throws an annual gala with a band, nice catering, and an auction. They have a staff member that spends half of their time getting the event together, and there is a board committee that helps sell tables and provides oversight for the event. At the end of the event the organization grosses $100,000. They are thrilled that they have made 20 percent of their annual budget in one night, right? Wrong.

Let's dig a little deeper. They have grossed $100,000, but what did it cost them to raise that money? The direct expenses for the event (the band, location, food, decorations, invitations, etc) cost them $50,000.

But they also need to factor in the indirect expenses. Their event coordinator spent half a year preparing for this event. Their Executive Director came to some meetings, met with the event coordinator, made phone calls to invite people and other activities. The Development Director also worked on the event. And the board committee put in many hours on the event. So if we calculate the hourly rate of those staff member's time (salary and benefits) and multiplied it by the hours they each worked, we'd get the cost of their standard value of volunteer hours ($20.25) multiplied by the number of board members who worked on the event and the average number of hours they spent. If we add all of this up we get:

Event Coordinator: $15,000
Executive Director: $4,000
Development Director: $5,000
Board Members: $3,000
Total Indirect Expenses: $27,000

So the total of the direct expenses ($50,000) plus the indirect expenses ($27,000) is $77,000.

Now, here's where it gets interesting. First of all, you see that the net revenue on this event is only $23,000 ($100,000-$77,000 = $23,000).

But how much did it cost to raise that $23,000? It cost $77,000 to raise $23,000, or if you boil it down it cost $3.35 to raise $1. That's insane, right? Although this organization actually made money, the cost of making that money is far larger than the money they made. And how does the cost of making this money compare to their other fundraising activities?

These two simple calculations, net revenue and cost to raise a dollar, could transform nonprofit fundraising efforts. If nonprofit organizations understood the net revenue and cost to raise a dollar of every fundraising activity they engaged in, they could determine the most effective use of fundraising resources and could focus their resources on those activities. The bottomline revenue to the organization would increase dramatically, while fewer resources would be expended on low net revenue activities. It could be transformative.

So let's take another example. An organization hires a major gift officer at $65,000 per year plus benefits who raises $500,000 per year in major gifts. If you include in major gift activities the costs for the Executive Director's and board members' time to go on fundraising visits and send thank you letters the total indirect and direct costs for major gift fundraising would be $100,000. So the net revenue ($500,000-$100,000) would be $400,000. And the cost to raise a dollar would be ($100,000/$400,000), $0.25, so it takes a quarter to make a dollar.

Then if the nonprofit compared that cost to raise a dollar to the $3.25 cost to raise a dollar with a gala, they could make a conscious and reasoned decision to forgo the fundraising event and focus more efforts on major gifts. They could take the $77,000 they spent on the fundraising event and hire another major gift officer.

I’m not suggesting that nonprofit events go away completely. I think they absolutely have a place as friend-raising, stewardship, and cultivation activities. An event can be a great way to celebrate the impact an organization is having and get more people to learn about them, or to thank donors who have been instrumental in the results an organization has achieved. But in terms of pure revenue-raising abilities, fundraising events are very inefficient.
 
And a sure path to greater efficiency begins with analyzing the effectiveness of your current activities. I’d love to see more nonprofits running the numbers on all of their fundraising activities and then making some hard choices about the best use of resources. The end result could be more money at less cost.

Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.

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1 Comments:

  • At 3:45 PM, Anonymous Amber Smith said…

    Hi Nell - I am glad you recognized the notion of 'opportunity cost' here, but I have a question. What if you have a team of volunteers who just has fun and would only want to volunteer to put together and host a specific kind of event for your cause? Is there an opportunity cost there, since that team of volunteers would not even be working with you if it weren't for the opportunity to host that particular event?

     

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