We’ve been told time and again not to judge a book by its cover. It’s a good approach to life – we never know what something is like behind closed doors, after all. We’ve moved on from covers—now we judge books based on their statistics.
And it’s not just books; we judge everything based on statistics. From the number of followers someone has on Twitter to the ROI of a corporation for the fiscal year – in the new age of technology, everything depends on its statistics.
Keep in mind that this development also applies to nonprofit organizations. People are not satisfied with how much work any organization does, anymore. They want to know the details, delve into the nitty-gritty, and know exactly how much money is being spent and on what.
Fundraising efficiency is the amount an organization spends to be able to raise $1. Reducing the amount you spend on every dollar you raise will make you a better charity. In simple terms, it means that by putting in less, you can gain more; this is the basic principle of any organization, whether they are working for profit or not.
Fundraising efficiency has become one of the new metrics upon which the charity in question is judged. It’s easy to calculate – you divide the fundraising expenses by the contribution income, which are all available in the financial reports. Charity Navigator, the largest independent charity evaluator, takes the average of the past three years for these two values and uses the same formula to get a better idea of how efficient the charity is.
Of course, it is natural for an organization to have to spend some money to be able to bring more in, but how effectively are they doing so? Are their efforts worth it? How can you be sure that the donation you are making will be used sufficiently? This metric helps answer these questions.
Donating to a group with a lower fundraising efficiency ratio is usually not recommended. Forbes advises against donating to any organization with a ratio under 70%. However, this is also a subjective call.
The nature of an organization’s activities may well impact the amount they have to spend to be able to raise money. For example, a food bank would have a lower value of expenses than, say, an organization that must spend on public broadcasting. These factors are all kept in mind, but the bottom line is this: minimize expenses as much as possible.
An issue that sometimes pops up with these calculations is that organizations sometimes identify contributions within their financial reports on multiple lines with different names. This problem sometimes leads to miscalculations, reducing the fundraising efficiency and hurting the charity’s image. It’s always best to keep all contributions in one line and add a subsection or footnotes for extra details.
Nowadays, resource providers, like donors, want to know every tiny detail regarding how the money they have donated is being spent. Fundraising efficiency is a good metric for meeting these donor demands and communicating the charity organization’s effectiveness.