You’re an executive director. Finances are tight. You need to grow your fundraising capacity but don’t have the money to do it. What do you do?
Most nonprofit leaders focus on executing those fundraising activities that raise the most gross revenues, not accounting for costs, especially staff and volunteer time. They also don’t compare the returns on investment of the different fundraising activities they want to implement. The result is that the organization raises money, maybe a lot of it, but never gets ahead.
As I explain in my latest book, The Sustainable High ROI Fundraising System, to be released in March, changing the situation requires changing the way you project income, account for costs, and utilize resources. The following snippets are excerpted from the book.
Focus on Net Income
“To really know if the activity raised money or not, you must talk about net income. It doesn’t matter how much gross income your staff raised because it’s net income that’s important. Net income is revenues minus costs. You can eat up all your gross income in costs if you’re not careful.
“For example, I once interacted with a nonprofit that raised $1 million a year through its gala. Its leaders didn’t understand why, with such great results, they were losing money in their overall budget every year. An analysis of their costs revealed that although they were raising $1 million each year, it took $1.25 million to raise it, meaning they lost a quarter-million dollars each year. I can give example after example of this occurring.
“Don’t let this happen at your nonprofit. Have your staff run the numbers. Be aware of your costs. Sometimes the activity raises more money just by reducing costs. If you want to really know how much your staff are raising, calculate net income. Take into account the costs and have the staff create a budget to realize positive net income.”
Underestimate Projected Revenues
“One of the most common mistakes I see when creating budgets is overestimating potential revenues. Both development directors and executive directors do it. Projected fundraising revenues should not be based on any revenue deficit either of you is trying to fill. Don’t base them on what the development team raised last year increased by an arbitrary percentage, either. Nor should you or your development director base projections on another organization’s fundraising results. Both overall and fundraising revenue budgets need to be customized to your nonprofit’s particular situation.”
“It is good practice to budget revenues lower than projected in case something happens and your development team cannot perform as well as expected. When you do come up with reasonably projected revenues, decrease them by 5 percent. Leave room for results to be lower than anticipated.”
Overestimate Projected Costs
“Underestimate revenues but overestimate costs. Expenses are easier to project than revenues because they are more constant. However, you want to project them higher than you expect so that you have money available if your bills come in higher than expected. Plus, it leaves a little extra room if revenues are lower than expected. To counteract the uncertainty, take what you think will be an expected increase in costs and add 5 percent.”
Include Total Costs
“And it’s not only direct expenses that count. It is total costs you and your development director need to be concerned with. A good example of where development directors don’t account for total costs is in their individual fundraising endeavors, especially grants and special events. I often see grant budgets with no acknowledgment of the indirect costs incurred, so the nonprofit ends up spending more money on the program than it takes in. The agency ends up constantly losing money. The same with special events. The average cost to raise a dollar through special events is 50 cents, not including labor. And special events are usually labor-intensive. These labor costs are rarely included in budgets or their analyses. Have your development director run the numbers accounting for labor and see how much you really make. If your agency is like most nonprofits, you actually lose money on your special events. Budget for total costs so that you are not making up for a constant loss.”
Compare Returns on Investment
“Return on investment is calculated by dividing revenues by expenses. It tells you how hard your dollars are working for you, that is, how many dollars your agency can realize per each dollar you invest in that activity.
“Some activities yield better results than others. For example, the average return on investment for major gifts is 900 percent, while the average return on investment for special events, not including labor expenses, is 50 percent. Too many nonprofits depend on special events, not their greatest return on investment, especially when factoring in labor costs. Compare the returns on your investment for each fundraising element you would like your development director to implement. See which ones yield the highest financial returns and consider investing your dollars there.”
Diversify Your Revenue Streams
“When times are good, it is easy to rely on a steady stream of funding. Overreliance on one funding source is not healthy. Your nonprofit is in the danger zone when 80 percent or more of your fundraising revenue comes from one source. And I mean that in terms of broad revenue channels as well as individual activities within each channel.
“There are four broad ways to realize revenue: earned income, or fees for service or product; unearned income, usually interest and dividends on investments; fundraising, that is, donations, grants, and special events; and government contracts. Studies show that nonprofits with two or more general revenue channels are more stable than those with one. On a macro level, you will do best with a more diversified funding mix.
“You also need to look at the individual elements within each channel. For example, if you rely on government contracts, are they from more than one federal agency? Do they include state or local government sources? Or, if you rely on fundraising, are all your eggs in the grants basket? If so, you need to diversify your sources of funding so that if one revenue source dips, for whatever reason, it won’t devastate your organization.”
Budget a Surplus
“Sometimes, nonprofits think they cannot budget for a surplus, that they should only raise as much money as they need for the budget year. That’s a mistake; you and your development director need to budget for surpluses. It’s how your nonprofit grows.”
“A healthy agency surplus is 3 to 6 percent of your operating budget. Your departmental, program, and event or activity budgets may individually be different, though. That’s okay—they’re all for different purposes. Make sure they maintain internal integrity with your overall budget.”
Next Steps
My book The Sustainable High ROI Fundraising System gives you much more information about measuring fundraising efficiency and implementing effective development strategies, with real-life examples of how the principles I teach were executed in four very different nonprofits. It’s jammed packed with advice on how you can realize sustainable positive net income. You can be the first to get your copy by clicking here
