What Should Fundraising Cost?

(Dec. 13, 2011) While most in the nonprofit sector are aware that fundraising is necessary, much of the public at large sees it as a distraction from a charity’s main purpose, rather than a function requiring investment.

Cost ratios have become widely adopted as a way to decide if a charity is using funds wisely, both by “watchdog” organizations and the media. The Canada Revenue Agency in its Fundraising Guidance also refers to the cost of fundraising but cautions that it is only one of many indicators that could result in concern. AFP has been sending the message that utilizing one ratio is too simplistic at best, and harmful in many cases.

“People like simplicity and want answers that are clear and crisp, but the fact is that good charities can have bad cost ratios and bad charities can have good ratios,” explained AFP’s Canada Government Relations Chair Ken Mayhew, chief development officer at MS Society of Canada in a webinar last Thursday presented by Charity Law Information Program (CLIP) and the AFP Foundation for Philanthropy—Canada. “Some administrative expenditures represent an important investment for future revenue growth for a nonprofit. Feeling the pressure to meet a certain cost ratio, however, charities can starve themselves and under-deliver on their mission.”

A fundraising cost ratio compares how much money is spent on fundraising compared to how much money goes to charitable programs. On its surface it may appear to be a helpful gauge of how well a donation will be used. In reality, it disguises many other important factors that people need to consider—one of which is that charities are not all the same, Mayhew argues.

“People don’t give in the same way to all organizations,” he explains. There are a variety of factors that make each charity unique in how much it has to spend to raise sufficient funds.

Factors Affecting Cost of Fundraising

Environmental – How important is your cause in the eyes of the public? Charities serving children and basic human needs, for example, may be perceived as having more importance or value or overall impact than an arts organization. The economic climate, size of the target audience and intensity of competition for funds also play a role in how easily a charity can raise money.

Organizational – How mature is your organization’s fundraising program? Long-established programs are often more efficient at raising funds. Do you have access to influential volunteers with resources or broad networks? Extent of government vs. self-driven funding plays a role, as does the degree by which your organization is dependent on expensive fundraising activities such as direct marketing and special events.

Operational – The size of the charity and its budget can affect the fundraising cost ratio, as does the dependence of the charity on donor acquisition programs to attract new donors. If the charity is mature and established, and has a loyal donor base, the charity may not need to spend as much on expensive programs for acquisition of new donors.

Unfortunately, fundraising cost ratios can be downright misleading. When viewing its Canadian form T3010, a charity that has local grassroots support, has high community impact and desperately needs funds may have a ratio of 40 percent of donations going to fundraising, whereas a charity with limited community impact may have a “better” ratio of 20 percent. Some methods of fundraising are more costly than others, but in the end they are often necessary for the organization to support its mission.

AFP has worked with CRA staff as a member of a broader coalition including Imagine Canada, Health Charities Coalition of Canada and numerous other organizations, on a revised version of the CRA’s Guidance on Fundraising released in June 2009. One major piece of guidance for the CRA was to place more emphasis on the overall transparency and effectiveness of nonprofits, rather than on simplistic cost ratios. Many changes were made based on AFP and the coalition’s feedback.

AFP provided additional written feedback (see Attachments) to the CRA on the Fundraising Guidance this past August. AFP looks forward to continuing to work with the CRA on this and other matters of importance to the nonprofit sector.

Changing Public Perceptions

In the end, while efficiency is good; effectiveness is better. The challenge for fundraisers and nonprofits is to counter the growing public perception that one number is sufficient for measuring a charity’s worth.

Mayhew suggests that nonprofits develop a proactive approach to responding to questions from the public and the media revolving around your charity’s fundraising expenditures. Devise a strategic formal business plan approved by your volunteers, have documentation of your organizational practices and policies relative to fundraising. Also, make sure you educate internal audiences as well: staff and volunteers. Work towards having a more integrated, diverse stream of funding. Above all, assure that your organization demonstrates consistent, ethical conduct in fundraising.

On a regular and ongoing basis, AFP addresses questions about fundraising costs with members of the media and writes letters to the editor and op-eds. If members and chapters see an issue arising related to fundraising costs, they should contact AFP International Headquarters.

For more on this topic, access the Hot Topic on Fundraising Costs.