Tuesday, November 23rd, 2004

News Updates

Calculating Your ROI For Development Costs

By Barbara L. Ciconte

In today's highly competitive environment for raising charitable dollars, your nonprofit needs to maximize its efforts to achieve greater success. To do this, managers need to evaluate the various types of fundraising activities to be certain the cost-benefit ratio or Return on Investment (ROI) is indeed favorable.

The nonprofit that focuses on cost-effective fundraising activities that develop long-term relationships with donors will be more successful in securing its future. Those organizations that do not consider fundraising costs will soon discover that their activities do not always correspond to increasing or sustaining funds.

If you have a viable database, it can be an effective tool in tracking information and reporting results that will help evaluate the effectiveness of your development program. Without such a database, gathering the types of information you need will be difficult if not impossible.

Specific fundraising activities' income and expenses must be gathered and recorded on a regular basis. To calculate your organization's ROI, follow these steps:

Step One: Track and analyze data on funds raised through direct mail, special events, major individual gifts, foundations and corporations by setting up specific campaigns, appeals, events, and mailings. Foundation and corporate giving is more easily tracked by using their specific classifications.

Step Two: Compare fundraising results by type of activity -- direct mail, special events, major individual gifts, foundations and corporations -- for a specific period of time (three years or more).

• Which generates the largest share?

• Which are the most reliable sources of income?

• Which are the least reliable sources of income?

• Which have the greatest potential for growth?

Step Three: By tracking and analyzing data, you will see which types of fundraising have increased, decreased or remained stable during this multi-year period. Once you have analyzed the results, ask yourself the following questions:

• To which areas should you allocate more time?

• Which area(s) should you eliminate?

• Where would you involve more volunteers?

• Given a larger budget, in which areas would you invest more?

Different organizations will see varying results using the same methods of fundraising based on the type of organization, level of staffing, budget, and volunteer leadership. Keep in mind that a donor acquisition mailing will have a much lower return on investment than a donor renewal mailing.

A capital campaign will produce a much higher return on investment than an annual fund program. A newly established planned giving program might have zero return on investment for the first few years, and the return on investment on a special event will be less than that of a major gifts program.

Step Four: Evaluate your performance using participants, income and expense. You should calculate net income by subtracting expenses from income received, cost of fundraising by dividing expenses by income received x 100 for percentage and return on investment by dividing net income by expenses x 100 for percentage.

How will your cost of fundraising compare with the percentage advocated by the Better Business Bureau (BBB) Wise Giving Alliance? According to the BBB Wise Giving Alliance, a self-appointed charity monitoring group based in Arlington, Va., fundraising costs should not exceed 35 percent of related contributions and total fundraising and administrative costs should not exceed 50 percent of total income.

Although the fundraising profession currently does not have industry-wide standards, the Association of Fundraising Professionals (AFP) has developed guidelines useful to nonprofits for evaluating the appropriateness of their fundraising costs. AFP states that the following factors should be considered in evaluating the return on investment in fundraising:

• The age of the organization. A well-established organization will be likely to have a return on investment greater than a newly established nonprofit.

• The age of the development department. A mature development department, professionally run, would be expected to produce a greater return on investment than a newly formed department. Different methods used in the fundraising process will produce different returns.

• The size of an organization. The return on investment may be affected by the size of the organization.

• The profile of the constituency. The economic and geographic profile of the constituency solicited will have an effect on the return on investment.

• The location of the organization. An organization located in an affluent region of the country should expect a greater return on investment than one located in a less affluent area.

• The popularity of the cause. The cause and its level of acceptance by the community will affect the return on investment.

• The competition for funds. Within the community or constituency that the organization is appealing to for support, the competition by other organizations may lower the return on investment.

Although there are no industry-wide standards, James M. Greenfield, CFRE, FAHP, author of several books on fundraising, has done considerable research in this area. In his book, Fundraising Cost Effectiveness: A Self-Assessment Workbook, he offered benchmarks for reasonable cost guidelines for solicitation activities that are used by many nonprofits to evaluate their own performance. (See accompanying box.)

When you compare your cost-benefit ratio to the benchmarks listed in the box, are you maximizing your time and effort on those activities that will raise increased funds for your organization more cost-effectively? Or are you utilizing too many of the activities that ultimately result in fewer dollars with considerable effort?

A successful nonprofit uses the information from its database to calculate ROI annually so that you can better target your fundraising efforts for maximum results for your organization.

Barbara L. Ciconte, CFRE, is senior vice president of Donor Strategies, Inc., Chevy Chase, Md. Her Web site is www.donorstrategies.com

Copyright © 2006 The NonProfit Times.