By Investing More Money
In Fund Raising--Wisely
Achieving Measurable Growth in Giving
By Doubling the National Fund Raising Budget
in Six Years from $19 Billion in 1990 to
$40 Billion in 1996--Wisely.
This article was originally presented as a paper at the
Third Annual Symposium, "Taking Fund Raising Seriously,"
at the Center on Philanthropy, Indiana University-Purdue University
at Indianapolis, June 6-8, 1990.
It was published in The Philanthropic Monthly, April/May, 1990.
by Wilson C. Levis
There is general agreement that giving must increase at a faster rate if nonprofits are to provide urgently needed services. However, increasing giving at a faster rate of growth will require wise investment in fund raising at a faster rate.
What is the current investment in fund raising? Using an estimate of 15% average fund-raising costs (National Center for Charitable Statistics, 1982), the nonprofit sector spent $16 billion in 1988 to raise $104 billion and net $88 billion for program.
Was it worth $16 billion? If nonprofits had not invested $16 billion in fund raising in 1988, tens of millions of people, in fact all of us, would not have benefited from the $88 billion of net funds raised.
What if the sector had invested $25 billion in fund raising? Could it have raised $140 billion and netted $115 billion? Research indicates that there is a vast untapped potential for giving in this country.
However, other research into the economics of charitable fund raising indicates that such an increase could not have been accomplished without first investing the additional money.
The nonprofit sector urgently needs to realize this, set aside its negative attitudes toward fund raising costs, and start taking the rate of growth of fund raising budgets seriously.
So, how can the nonprofit sector increase the annual rate of growth of giving from the current 10% to 12% or more? By increasing the rate of growth of fund-raising budgets from 10% to 12% or more--wisely. And, how can the nonprofit sector do this?
Individuals give primarily because they are asked to give. Therefore, it is recommended that "ask-more" programs be conducted around the country with a goal of increasing the annual rate of growth of fund raising budgets to 12%. This will double the national fund raising budget in six years from an estimated $19 billion in 1990 to $40 billion in 1996. The ask-more" programs would encourage non-profit boards, CEOs and funders to invest more money in asking more donor/prospects to give more money.
However, translating giving potential into gifts cannot be accomplished simply by increasing fund raising investments. Following these proposed guidelines for wise investment in fund raising is essential:
Increasing Giving at a Faster Rate of Growth
What is the current rate of growth in giving?
According to Giving USA, published by AAFRC Trust for Philanthropy, Americans gave $104 billion in 1988. The rate of growth was 11 % over giving in 1987. The 1987 rate of growth was 6.2%.
The average rate of growth over the five-year period from 1984 to 1988 was 9.7%.
What could the rate of growth realistically be?
In 1985, Independent Sector's Measurable Growth Program set as its goal an annual rate of growth in giving of 12.2%. This rate of growth would have doubled giving in six years from $80 billion in 1985 to $160 billion in 1991. (The Measurable Growth Program is now the Give-5 Program.)
For its part in the Measurable Growth Program, the United Way of America, in 1986, set a goal of 14.9% annual rate of growth for its Second Century Initiative--to double giving to United Ways in five years by 1991.
Research by these two organizations, and by the National Charities Information Bureau and the Program on Nonprofit Organizations at Yale University, indicate there is a vast untapped potential for individual giving in this country.
Yet, it appears that Independent Sector's goal of 12% annual growth and the United Way of America's goal of 15% annual growth will not be met.
Why? Because, United Ways and other non-profits have not been investing 12% to 15% more money in the fund raising capacity and effort required to ask more individuals for 12% to 15% more in giving.
Individuals give primarily because they are asked to give, and not because they have the potential to give or because nonprofits set goals for them.
Investment in Fund Raising At A Faster Rate Is Required
Effective asking costs money. It involves needs assessment, case development, market research and feasibility studies, prospect research, fund raising planning and budgeting, volunteer solicitor recruitment and training, volunteer solicitation (asking), gift processing and acknowledgment, donor recognition, donor record keeping, results analysis, fund raising performance measurement and evaluation. Conducting all these fund raising activities costs money and requires fund raising capacity and training which also cost money.
Without the resources to conduct all these fund raising activities with all the potential sources of funds, nonprofits cannot significantly increase the rate of growth of fund raising results. This is supported by research into the economics of charitable fund raising showing that there is a direct relation ship between fund raising expenditures and fund raising results (Jacobs and Boyle, Economics of Charitable Fund Raising, Philanthropy Monthly, May, 1978).
Enter the Fund Raising "Investor"
Fund raising investors include nonprofit board members and CEOs that make fund raising budget decisions. Fund raising investors also include donors who make fund raising grants to broaden bases of support and to build organizations' capacity to raise money. Fund-raising managers, who do not make budget decisions, are not fund raising investors. Fund raising managers recommend fund raising investments and then spend the money that fund raising investors invest.
Increasing fund raising investment at a faster rate will not automatically increase individual giving at a faster rate. But, it is doubtful that giving can be increased substantially unless fund raising investors make corresponding increases in fund raising investments.
After setting challenging fund raising goals, investing more money in fund raising wisely--in order to achieve those goals--will be the real challenge for fund raising investors.
Guidelines for Investing in Fund Raising Wisely
It may seem that this article is encouraging non-profits across the country to make significant increases in their fund raising budgets in the belief that this would automatically increase results. This is not the case. Translating fund raising potential into actual results cannot be accomplished simply by increasing fund raising budgets. Wise investment in fund raising is essential.
The following nine rules are proposed as a "first cut" at developing guidelines for investing more money in fund raising--wisely.
RULE 1. Set Aside Negative Attitudes Toward Fund Raising.
Fund raising investors must set aside any negative attitudes they may have toward fund raising and fund raising costs.
There are both legitimate concerns and uninformed negative attitudes toward fund raising costs. Fund raising investors cannot think clearly--wisely--about investing money in fund raising if their thoughts are filled with concerns or biased by negative attitudes.
To lift fundraising budgeting to investment quality requires serious and careful attention to known guidelines.
One important example of a legitimate concern: new donor acquisition efforts usually cost 75% to 150% of what they raise. However, to be effective, fund raising investors must accept that such performance is considered reasonable by virtually all members of the fund raising profession and by most nonprofit executives. The reality is that this has been the practice for decades. Many of the most prestigious and successful charities have developed very efficient multi-million dollar annual appeals and major donor programs with donors acquired at 100% fund raising costs.
Investing more money in new donor acquisition--broadening bases of support -- is absolutely essential to increasing giving at a faster rate of growth.
RULE 2. Match Fund Raising Costs With Related Revenue.
Budgeting and accounting systems should be set up to match expense and related revenue for each fund raising effort.
How can revenues be matched with related expenses?
The concepts of assigning responsibility for, budgeting for, accounting for (matching), and evaluating fund raising expenses and related results effort by effort may be new to nonprofits in general. These concepts fall into the general category of cost accounting; more specifically responsibility accounting, profitability accounting, or activity accounting.
However, they are new to most other forms of fund raising.
How does this work for direct mail fund raising?
First, all new donor acquisition mailings to cold prospects are categorized separately from renewal mailings to prior donors.
Second, a return-on-investment code (ROI-code) is assigned to each fund raising mailing. Sometimes a single mailing will have several ROI-codes identifying the different lists and appeal materials used.
Budgeted and actual costs are allocated to each ROI-code based on the number of names assigned to the ROI-code.
Projected results plus actual receipts are matched to related mailings by ROI-code.
Sophisticated computer analysis by ROI-code include, but are not limited to:
The cost data is most significant. Most fund raising operations have just as sophisticated analyses for the revenue side of their other fund raising categories but include no cost data.
The information outlined above is far more detailed than the information needed by fund raising investors for reviewing and evaluating fund raising investment requests. But, all the information fund raising investors need is included.
If nonprofits are to be able to invest more money in fund raising wisely, they are going to have to adapt the budgeting and accounting techniques they now use for direct mail fund raising--and for program services--for all their fund raising activities.
RULE 3. Recover fundraising investments from related gifts as they are received.
Recovering investments in fund raising by deducting costs from related gifts when they are received is an uncommon (or maybe non-existant) practice today. However, no accounting concept could be potentially more important for the nonprofit sector.
If there is a vast untapped potential for individual giving and if costs can be deducted directly from related gifts, there must be a vast untapped source of funds to spend on fund raising.
Can fund raising costs actually be deducted from gifts received?
Yes. In fact, all fund raising costs are deducted from somebody's gifts.
Where else can they come from?
United Way allocations? Government grants? Program service fees? Bona fide membership dues and assessments? Investment income? Unrelated business income?
No. Virtually all fund raising costs are deducted from somebody's unrestricted, direct public support gifts.
At the end of a fiscal year, nonprofits in effect deduct all fund raising expenses from unrestricted gifts received. However, 70% 80% or 90% of these costs--depending on various circumstances--could be deducted directly from related gifts as they are received. If nonprofits are going to deduct fund raising costs from gifts anyway, why not do so usefully--wisely?
Unfortunately, no examples have been found where a nonprofit has actually deducted fund raising costs from related receipts. However, here is an illustration of de facto deduction of fund raising costs from related gifts. In 1974, a popular charity serving hard-core community problems in a major city invested $1,800 in a mailing to 8,000 randomly selected residents in the community (note that these are actual 1974 figures and would be two or three times greater today). The mailing produced over 200 new contributors and raised nearly $3,000.
In January, 1975, based on the successful $1,800 test mailing, the charity invested $13,000 in a mailing to 100,000 demographically selected residents. Another 2,600 names were added to the donor list. The mailing generated more than $28,000. The charity invested in two more mailings in 1975 at a cost of $13,000 each. Their total investment in new donor acquisition for 1975 was $39,000 They acquired 6,800 new donors and raised $78,000.
Whose money did the charity spend on fund raising?
Where did (1) the initial $1,800 and (2) the $39,000 the charity spent on fund raising in 1975 come from? The donors, of course. It had to come from the donors who gave the initial $3,000 in 1974 and the donors who gave $78,000 in 1975.
If there had been a loss, it would have been deducted from the charity's reserve which also came from contributors--prior contributors. In either case, the fund raising costs would have been paid for with money from some group of contributors.
And, exactly how did the charity have the donors pay for the fund raising costs? In January, 1975, based on the success of the initial test mailing, the charity placed orders for $13,000 of fund raising materials and services. A mailing went out to 100,000 people. $28,000 came in. Then the suppliers were paid $13,000 of the $28,000 raised. Thus, while the charity was at risk, it did not even need a working capital fund to finance its fund raising investments. And, finally, the 2,600 donors more than covered the fund raising costs related to their gifts.
Note that, in 1975, the charity spent $39,000 on new donor fund raising but only invested $13,000 which it rolled over three times during the year and had fully recovered by year's end.
If nonprofits are to spend money on asking at a faster rate in order to increase giving at a faster rate, they need to take a bona fide investment approach to investing more money in fund raising. They need to start testing the overt deduction of the money they have "invested" in fund raising directly from the gifts their investment generates. In other words, fund raising investors--nonprofit boards and CEOs and grantmakers--should invest money in fund raising. Fund raising managers should submit requests for fund raising investments and then spend the money approved for investment in fund raising. The accounting department should recover the funds invested by the fund raising investors from related gifts as they are received
If direct mail fund raising can be financed in this manner, other methods of fund raising can be financed this way too.
Fund raising budgets, now growing by 10 percent annually, must increase--by expanding selectively to a 12 percent growth rate.
If investors in fund raising can literally invest money in fund raising rather than spend money on fund raising, then what they will need is more working capital to invest in fund raising, not more money to spend on fund raising. And, the amount of working capital needed to invest in fund raising will be a fraction of the total amount of money needed to spend on fund raising. Nonprofit boards will be able to set up revolving-fund budgets for investing in fund raising. Grantmakers will be able to provide interest-free loans, revolving fund grants, and recoverable grants to enable grantees to expand their fund raising efforts.
RULE 4. Invest by Appropriate Categories of Fund Raising.
Requests submitted to fund-raising investors for investments in fund raising (i.e., budget or grant requests) should be presented by categories appropriate for making wise investment decisions.
Separate investment decisions, including fund raising grants, should be made for the following categories of activities related to fund raising.
a. fund raising investments in the capacity-building category are essential for long-term increases in the rate of growth of giving. However, capacity building produces no income and, therefore, cannot be evaluated in terms of return on investment. Capacity building includes:
Since capacity building produces no income, investments in capacity building cannot be matched directly with specific gift receipts from which these investments can be deducted. Capacity-building investments are long-term investments that must be charged to the general operating fund, taken from reserves or funded through a capacity building grant.
New donor acquisition and related categories are intended to broaden a nonprofit's base of support from individuals. Through new donor acquisition efforts, usually by direct mail, nonprofits build lists of several thousand donors that make small-to-medium size gifts. Then nonprofits can identify several hundred prospective major donors from these lists of prior donors. Nonprofits seldom can start out soliciting a select group of several hundred individuals for major annual gifts and planned gifts.
b. New donor acquisition efforts are income producing, but they are usually not expected to, or intended to produce net contributions. Most, if not all, direct, variable costs associated with new donor acquisition can be deducted from related gifts as they are received.
c. Individual donor renewal is the category of fund raising activity that produces net contributions from the second, third, etc. gifts from prior individual donors. Donor renewal focuses on retention and upgrading of prior donors. It includes major individual annual gifts, special gifts, capital gifts and gifts for endowment. It is expected to be efficient and to produce significant net contributions from individuals.
Because of the large margin of "profit" all the costs associated with donor renewal can be deducted from related gifts as they are received.
d. Individual planned giving should be invested in separately from other donor renewal activities.
Planned giving activities are directed toward those annual donors who respond to requests that they consider making bequests or other deferred gifts. Planned giving has enormous potential for many nonprofits, and it can produce large sums of net contributions--eventually.
It should be invested in separately because, while it produces income, the related costs occur many years before the income is received. Therefore, it is not feasible to deduct related fund raising costs from planned gifts received. However, once a planned giving program begins producing cash income, current-year planned giving costs can be deducted from unrelated cash planned gifts received.
e. Grantseeking from institutional sources such as corporations and foundations generally produces net income, even with the first grant.
Because of the large margin of "profit", all the costs associated with grantseeking can usually be deducted from the unrestricted portion of related grants as they are received. However, there will be a shortfall if too many of the grants are restricted and the sum of the unrestricted grants does not equal all the grantseeking costs.
RULE 5. Give Fund Raising Investors Decision-Useful Information.
(See illustrative Fund Raising Investment Request Form, below.)
For investing in all fund raising activities except capacity building, fund raising investors need in formation that will enable them to determine if each proposed investment is projected to have the rate of growth they want and to have a reasonable fund raising cost percentage.
The fund raising investment request for each fund raising activity should present expenses, projected results, and projected fund raising cost percentages. The request should show the net return for last year and the projected rate of growth. The request should also include projected number of gifts and average gift size. Each fund raising investment should be assigned a return on investment code (ROI-code). The category or purpose for each fund raising investment should be specified--e.g., new donor acquisition, donor renewal, planned giving, grantseeking (type code).
The Fund Raising Investment Request Form shows the projected net return on investment and the projected annual rate of growth that net return represents. Fund raising investors can see quickly if the sum of the projected net returns is equal to or greater than the goal for financing the program services planned for the following year. (The net funds raised this year should be the basis for the program budget for the next year.) Fund raising investors can also see if the projected overall rate of growth of net return on investment is equal to the goal for growth.
The accounting system should be set up to match and report the actual expense and related revenue for each fund raising effort. This should be done in the same format as the budget (i.e., the fund raising budget request). Actual expenses and results can then be compared with the budgeted expenses and projected results so that more accurate budgets and projections can be made in the future.
RULE 6. Keep Fund Raising Cost Percentages Reasonable.
(See Suggested Reasonable Fund Raising Cost Percentages Table below.)
Projected fund raising cost percentages are included on the Fund Raising Investment Request Form for each request. These cost percentages should be reviewed during the budgeting process to assure that they are reasonable for each type of fund raising activity conducted.
Fund raising investors should keep in mind that, if 80% of the money comes from the 20% who are major donors, then 90% of the net money comes from these donors. This is because the cost percentages from major donors is 5% to 15%, while gifts from the other 80% of the donors might cost 20% to 50%. But, tomorrow's major donors are among today's 80% that are at the small-to-modest-gift level. And, $5.00 donors have their place in philanthropy--even at 50% fund raising costs.
RULE 7. Do Not Try to Lower Bottom-Line Fund Raising Cost Percentages
Fund raising investors should not pursue an investment policy of lowering overall annual fund raising cost percentages by reducing efforts to broaden the base. Doing so, in the long run, significantly reduces the rate of growth of net contributions. In fact, nonprofits that don't invest in new donor acquisition, for example, can experience a reduction in revenue and may even die.
The Suggested Reasonable Fund Raising Cost Percentages table does not include criteria for the reasonableness of overall fund raising efficiency. This is because the efficiency of new donor acquisition should be measured and evaluated separately from donor renewal using substantially different performance criteria. And, the efficiency of major gift fund raising should be measured and evaluated separately from small-to-modest gift fund raising using substantially different performance criteria. And, since capacity building produces no income at all, its cost percentage is infinite. There are no reliable performance criteria for determining the reasonableness of fund raising efficiency when acquisition data are combined with renewal data, when major gift data are combined with small-to-modest gift data, or when capacity-building costs are included.
In this regard, legislators, regulators and the media continue to focus on the bottom-line fund raising cost percentage. Since negative attitudes on the part of fund raising investors create resistance to increasing the rate of growth of wise investment in fund raising, charity legislators, regulators, review groups, and investigative reporters need to find ways to expose fund raising abuses without at the same time creating and/or re-enforcing negative attitudes about fund raising costs.
The bottom line fund raising cost percentage can be used as one tool for helping them identify potentially abusive situations that warrant further investigation. However, high cost percentages are not abuses, and other criteria must be applied in order to determine when an abuse has occurred.
RULE 8. Test New Fund Raising Efforts.
To the extent possible, new fund raising efforts should start with modest investments on a test basis.
New donor acquisition efforts should start with a test of 5% to 10% of the names on each proposed mailing list. Further use of each list should be contingent on satisfactory test results. The criteria for satisfactory test results should be established before each test is approved.
Fund raising consultants can be used on a part time basis to test such activities as major individual gifts, corporate and foundation grants, and/or planned giving.
RULE 9 Learn from every fund raising investment.
Fund raising investors should learn from every fund raising investment experience they have.
Fund raising investment requests should be accompanied by data about the results of previous fund raising investments so that investments in subsequent fund raising efforts can be based on evaluations of the performance of previous efforts.
RECOMMENDATION: An "Ask-More" Program
So, how can the nonprofit sector increase the annual rate of growth of giving from the current 10% to 12% or more? By increasing the rate of growth of fund raising budgets from 10% to 12% or more--wisely. And, how can the nonprofit sector do this?
Individuals give primarily because they are asked to give.
Therefore, it is recommended that "ask-more" programs be conducted around the country with a goal of increasing the annual rate of growth of fund raising budgets to 12%. This will double the national fund raising budget in six years from an estimated $19 billion in 1990 to $40 billion in 1996. The "ask-more" programs would encourage non-profit boards, CEOs and funders to invest--wisely --more money in asking more donor/prospects to give more money.
The "ask-more" activities, while much more narrowly defined, would be compatible with, and mutually supportive of the Independent Sector's Give-5 Program.
Leadership for the "ask-more" programs could come from the fund raising profession and their professional societies and chapters. Implementation would be through collaborative efforts and partner ships among professional fund raising groups, non-profit umbrella groups and resource-provider groups--e.g., NSFRE chapters, nonprofit associations, and regional grantmaker associations.
Funding Fund Raising is Key.
More and more resource providers are helping their grantees increase giving from other sources. These resource providers include philanthropists, corporations and foundations, United Ways, and government agencies. They are in the best position to influence increased wise investment in fund raising for individual gifts.
By making fund raising grants wisely, funders will be showing fund raising investors on the boards and staffs of their grantee organizations how to do it.
What could funders fund?
1. Grantmakers could fund an initial fund raising audit and then encourage grantees to periodically assess their fund raising capacities and the effectiveness of their fund raising efforts.
2. Grantmakers could fund projects to increase fund raising capacities based on these assessments.
3. Grantmakers could make revolving-fund grants or loans to grantees for investing more money in their fund raising efforts that produce income.
4. Grantmakers could make matching and challenge grants (a) to increase the effectiveness of grantee fund raising efforts and (b) to encourage grantees to assess and enhance fund raising capacity.
5. Grantmakers could make grants to finance the first 3 to 5 years of planned giving programs.
Direct grants are needed for categories 1 and 2 which produce no income. Revolving-fund grants or loans are more useful in the long run than direct grants for fund raising activities that produce income. Challenge grants (category 4) can be coupled with, and enhance the effectiveness of capacity building grants. Elements of challenge can be included in many gifts and grants from all sources. Even though planned giving programs (category 5) are income producing eventually, direct seed-money grants are needed because it can take 5 years or more before the bequests and deferred gifts to begin to produce cash income.
Once grantees implement the first two types of fund raising grants, their fund-raising investors will quickly see that they can justify using their own funds for periodic assessments and capacity building.
And, they will also see that in applying the revolving-fund grant they have in effect set up a revolving-fund budget for investing in fund raising to which they can add some of their own resources.
|Fund-Raising Activity||Type||Fund-Raising Investment Request||Projected results||Net Return On Investment||Projected Fund-Raising Cost Percentage||ROI Code||Net Return Last year||Rate of Growth||Projected Number Of Gifts||Projected Average Gift Size|
|BEG. OF YEAR:|
|ADD-ONS DURING YEAR:|
|FUND-RAISING COST PERCENTAGE (EFFICIENCY): Fund-raising expense as a percent of contributions.|
|Average Gift-Size Range (Contributions Divided by Number Of Gifts)||BROADENING BASE||RAISING NET DOLLARS|
|New Donor Acquisition, List Building, First Gifts, Special-Event Promotions||Donor Renewal, Major Gifts, Planned Giving, Capital Campaigns, Corporate and Foundation Support|
|$1,000,000 & Up||4.0%||10.0%||2.0%||5.0%|
|500,000 - 1,000,000||5.0%||10.0%||2.5%||5.0%|
|250,000 - 500,000||6.0%||12.0%||3.0%||6.0%|
|100,000 - 250,000||8.0%||14.0%||4.0%||7.0%|
|50,000 - 100,000||10.0%||16.0%||5.0%||8.0%|
|25,000 - 50,000||12.0%||20.0%||6.0%||10.0%|
|10,000 - 25,000||14.0%||24.0%||7.0%||12.0%|
|5,000 - 10,000||16.0%||30.0%||8.0%||14.0%|
|2,500 - 5,000||18.0%||40.0%||9.0%||16.0%|
|1,000 - 2,500||25.0%||50.0%||10.0%||18.0%|
|500 - 1,000||30.0%||75.0%||12.0%||20.0%|
|250 - 500||40.0%||100.0%||14.0%||22.0%|
|100 - 250||50.0%||100.0%||16.0%||25.0%|
|50 - 100||50.0%||100.0%||20.0%||30.0%|
|25 - 50||75.0%||125.0%||25.0%||40.0%|
|10 - 25||100.0%||150.0%||35.0%||50.0%|
|5 - 10||100.0%||150.0%||50.0%||75.0%|
Criteria for determining if fund-raising costs for each proposed fund-raising investment are reasonable, vary according to the following two dimensions.
1. The objective: (a) broadening the base of support (e.g., new donor acquisition) or (b) raising NET dollars (e.g., donor renewal). Broadening the base is not expected to produce significant NET gifts and costs of 100% or more can be reasonable. Raising net dollars, usually from prior donors, should cost less than 30% on average.
2. Projected average gift size. For example, reasonable donor renewal costs can vary from 2-5%: for a $1 million average gift size to 50%-100% for a $2.00 average gift size.
Wilson C. Levis is Senior Research Associate of
the Nonprofit Management Group, Department of Public Administration,
Baruch College/CUNY, New York, New York.
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