In the past, people used to look at how an organization ‘felt’ to decide whether it was reliable and trustworthy or not. After all, donating to a nonprofit organization should feel good to the donor.
The focus used to be on the look of the organization and other elements visible to donors on the surface and not on details or statistics. Therefore, the underlying assumption was that any money spent on operations of a nonprofit was money being diverted away from the organization’s core mission.
Any money spent on anything besides serving the organization’s cause was considered to have been taken by operation personnel. Fundraising was considered a necessary evil – it was necessary but the money going into it was something of a waste, since it could easily be spent on the cause itself.
The problem with this mindset is that it doesn’t acknowledge how important it is for nonprofits to invest in strategic fundraising to sustain themselves in the future. It encourages nonprofits to cut down on their fundraisers until they stagnate and eventually die out. This mindset also leads to the general public judging and comparing organizations on the basis of how much they spend on fundraisers as if that is an accurate measure of impact – which it certainly is not.
However, this way of thinking is changing now. Many people are now moving towards the belief that an organization’s expenses don’t matter and are irrelevant when talking about impact. The idea that fundraising is necessary – and not a necessary evil – is gaining popularity and more and more people now support organizations based on their statistics, and the visual representation of their impact, while believing that expenses have to be made to be able to get any return.
This is why the concept of fundraising efficiency exists.
What Is Fundraising Efficiency?
In technical terms, ‘efficiency’ refers to the ratio of the total input to the total output. In operations, for example, if you need less raw material to be able to produce more of your final product, then you’re obviously doing something right because less raw material means low cost of production, so whatever you end up selling will get you more profit in the end.
The concept is the same in fundraising, except you’re not working for profit here. Fundraising efficiency is usually considered the amount of money you would spend to raise $1.
But how do you know the organization is actually efficient? Usually, the expenses (the monetary input) are compared to the contribution income (the resulting monetary output) to calculate a fundraising metric called the fundraising efficiency ratio.
A nonprofit will obviously have its own numbers, but if a donor wants to calculate how efficient an organization’s fundraising is, the values can be easily found on the organization’s Form 990. This form is filed by nonprofits to be tax-exempt. Donors can also look into the financial statements that are usually available to the public on the nonprofit’s website.
Fundraising efficiency is a good measure for impact since it looks at how well an organization can minimize the use of its existing resources with the maximum possible effective output. However, it is still not the final word on the topic.
Firstly, many factors affect efficiency; you cannot consider all calculations of efficiency to be representative of the same thing. Though there is a baseline, there are differences that exist between organizations that can change the way numerical values of efficiency are viewed. We will look at these further in the article.
Why Should I Care About it?
The new age declared a change in the way we – as individuals and as parts of an entity – have to conduct ourselves. With all our statistics out there on the internet for the world to see, factors like ‘vibe’ and ‘feeling’ are losing weight.
No one wants to know how good it feels to be at an organization’s fundraiser. They want to know how much impact the fundraiser had quantitatively, and what benefit came to the nonprofit’s beneficiaries from the donated contributions.
With so much dependency on statistics, it is no surprise that efficiency – which is a statistical measure of what was once a subjective fundraising KPI – is now also very important to any organization. It is not only used for gauging the image and reputation a nonprofit holds in the eyes of the public, but also for maximizing its impact in a way that ensures sustainability and growth towards its cause.
After all, who wants to contribute to an organization that can’t manage the amount of money it spends on support functions? Any donor’s primary goal when donating is for them to be able to make an impact by donating money. When they see that an organization is not able to maximize the benefit they could be providing, it disheartens them and compels them to find someone else to donate to, who could use their money better.
Gone are the days when an outward look at the performance was enough for basing a decision. Now, donors want to know all the details, dive into the finances, and see where each cent goes, and how much impact it has.
What does this mean for your nonprofit?
Your fundraising efficiency is important because it counts. Since the calculations depend on your finances, you obviously want to make sure your expenses and income are proportioned in a way such that it maximizes your efficiency and makes your donors want to stick around and keep donating because they view you to be a reliable organization.
It’s all cyclical: if you are efficient in your fundraising, then your impact increases, and you manage to invest more to increase your efficiency, which will further help your impact grow.
How Frequently Should I Measure my Fundraising Efficiency
Consider this: you have calculated your expenses and your predicted income, and you’ve got a potential value for how efficiently you’re operating your nonprofit. But that’s not enough.
With how important the value of fundraising efficiency is, not just for your reputation but also for your overall performance and sustainability, it would naturally make sense to measure it as frequently as possible.
But you also don’t want to be too frequent. After all, it isn’t really practical to measure the efficiency with every expense incurred and every unit of income received. Such minute measures of efficiency aren’t telling of overall performance, anyway.
To be able to get a good idea of how well your organization is functioning and whether it is efficient or not, you would probably want to measure efficiency regularly. You should do so when enough time has passed in between for any change to be noticeable. However, don’t schedule your measurement too far apart so you can take note of which activities were effective in improving efficiency, and which weren’t.
For example, you probably wouldn’t see much of a difference in a week since activities don’t change quite as much within a week, and the likelihood that your calculations would get you approximately the same result each time is high. However, there is quite a lot of room for change every quarter, and a number of those changes could have had an impact – whether it is positive or negative.
You want to be able to see which change or activity bore positive results and which had negative ones. If you have a combined result, you may not be able to find the factors behind the results.
However, every month, you’d be able to judge what activity accounts for what change. A month is plenty of time for noticing the visible change and inferring its causes.
How to Calculate Fundraising Efficiency?
The measure of fundraising efficiency is known as the fundraising efficiency ratio, because it is the ratio between the expenses incurred on fundraising activities, and the income received in return.
The ratio is one of the fundraising key performance indicators that many nonprofits use to measure how good they are at raising money. Four of the seven financial performance metrics that experts usually analyze are about efficiency: program expense percentage, administrative expense percentage, fundraising expense percentage, and fundraising efficiency.
Program Expense Percentage
Of course, charities exist to provide programs and services. The expectations of givers are fulfilled only by allocating most of their available budget on charitable missions that work towards achieving their goals.
The program expense percentage is calculated by taking the program expenses and dividing it by the total expenses incurred. This way, you will be able to calculate how much of your money goes into one specific program and allows you to budget accordingly, or cut down on the program’s costs or increase them when necessary.
Administrative Expense Percentage
Any successful organization in any sector has to recruit, develop, and retain talent, and effective nonprofits are no different. However, for charities, these administrative expenses should remain within a reasonable limit and stay in line with the nonprofit’s total functional expenses.
Administrative expense percentage is the same as the program expense percentage, except it calculates the percentage of the expenses incurred on administrative work out of the total.
Fundraising Expense Percentage
Supporters of any charity do so for their programs and services and not for their ability to raise money. Charities should make it a point to ensure that fundraising expenses should not go overboard and stay in line with the organization’s total functional expenses.
As with the two metrics given above, the calculation for this one is the same. You divide the total fundraising expenses by the total expenses to find the percentage.
Fundraising Efficiency Ratio
If a charity is financially effective, it is also likely to be efficient at fundraising because it would spend less to raise more. You can calculate a charity’s fundraising efficiency by dividing the total expenses by the total contributions.
A point to note here would be that if you are calculating any of these metrics, you won’t get very meaningful results solely by calculating them for one time only. Charity Navigator, a leading evaluator of charities, measures these by taking the average of each of them over three years. By taking an average, you can avoid any results that may show significant changes as a result of outliers.
For example, if you hold a very large event in the first month and smaller ones for the next three months, there will be a large difference in your calculations. By taking an average, you can avoid this issue and be able to measure your efficiency better.
What Is a Good Efficiency Ratio?
Now, you should be able to calculate efficiency as a ratio or percentage. However, what is a good fundraising efficiency ratio? How do you know you are truly being effective in your fundraising and not on either end of the extremes, i.e., you are not spending too much, but you are also not spending too little.
Since different nonprofits carry out different programs, there is no ‘one-size-fits-all’ answer. Their operations differ, and so do their expenses and financial structure. For example, an organization that focuses mostly on feeding the poor will have a different set of expenses than another that works towards providing clean water in an entire area.
Keeping that in mind, you can’t say that a certain ratio is ‘good’ for all nonprofits out there. There will always be some necessary expenses you can’t avoid that are large, and others that are within your control.
A good fundraising efficiency ratio is one where both of these are taken into consideration. It should allow you to actively see money being put into a project get a larger return, but the scale of that return would depend on the organization.
How Do I Improve My Fundraising Efficiency?
Naturally, with how important efficiency is to any organization – not just nonprofits – you’d want to do your best to improve it in any way you can.
As mentioned above, the outcome of any one event does not guarantee efficiency. You may have received a large amount of money from a fundraising concert, but if you don’t take into account how much you spent on collecting it and the ways that money could have been better spent, you are not looking at efficiency properly.
Look back at the four different ways of measuring efficiency. Four key elements are within your control: program expenses, administrative expenses, fundraising expenses, and total expenses.
You cannot get rid of expenses entirely, but you can do your best to reduce them. The focal point is minimizing costs, and if you minimize them, you will be able to dedicate a larger portion of your income to your cause.
You could analyze your total expenses and see which ones can be eliminated and which ones are necessary. If you can reduce any expenses from anywhere, you will be improving your efficiency ratio. Every penny counts.
This approach is not limited to your total expenses. Look at the different expense categories. If you can reduce the amount you spend on a program without sacrificing quality, you should do it. Looking at the program’s results also helps: if it is not as successful as others and not having the desired impact, you may want to consider removing it from your expenses altogether.
Similarly, by cutting down on administrative expenses, you can reduce the total amount you spend, and you can maximize the amount you make.
For example, if you decide to outsource some of your supporting functions or find volunteers, you can save up on the monthly salaries you would have to pay. However, you should keep in mind that not all expenses are bad, and you should carefully evaluate expenses to identify the ones that are bringing returns.
The other element that is not entirely within your control is the contribution income. You do not have a say in what amount contributors will donate. However, you can do your best to maximize contributions by focusing on retaining the donors you have; doing so will maintain a regular source of income, allowing you to focus on acquiring new donors.
Fundraising efficiency is one of the most important aspects of running a nonprofit since sustainability, growth, and impact are all dependent upon it. That is why it is crucial to keep it at the front of your mind when you are planning any aspect of your organization’s operations.