Fundraising Q&A: How to count fundraising costs

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How do I count fundraising costs to determine the average per dollar raised?

The average cost per dollar raised is a frequently asked question but the answer is less meaningful if you’re trying to compare dissimilar charities who have traditionally allocated costs differently. With continued media attention, the cost of raising money is in the forefront of many people’s minds. It’s important that the leadership team (board and chief executive) take fundraising costs seriously but it’s hard to ensure we’re comparing apples to apples.

I’ve covered the Canada Revenue Agency’s Fundraising Guidance in July and November 2009 but to recap, its purpose is "to support registered charities to comply with reporting requirements related to fundraising, and encourage them to self-assess their fundraising activities." Therefore, overseeing the proper allocation of fundraising expenses is one of the main priorities of their policy.

CRA considers the fundraising ratio (receipted and un-receipted donations against the expenses incurred to cultivate, raise, and steward the funds) as only one factor in their analysis. This ratio is calculated by line 5020 “total expenditures on fundraising” divided by line 4500 “receipted gifts except enduring property” plus line 4630 “non-tax receipted amounts from fundraising”.

What appears to be a simple way to assess efficiency may well overlook fundraising effectiveness. The objective is not to spend as little as possible but to maximize the dollars raised while remembering that some of today’s investment will produce future rather than immediate returns.

Canada Revenue Agency, major donors, and investors all understand there is a cost to doing good business. The fundraising ratios are only one measure. Costs of fundraising vary according to the:

  • Age or maturity of the organization and its development department
  • Size of the charity and its budget (both overall and fundraising)
  • Popularity and nature of the cause
  • Methods used
  • Sources of fundraised income
  • Skills of the development staff
  • Strength and involvement of the organization’s board and senior staff
  • Use of volunteers
  • Averaging costs (over a period of three to five years)
 

What do the experts say?

Prompted by the recent September 22, 2010 CBC publicity headlined “Charities paid $762M to private fundraisers” the Association of Fundraising Professionals (AFP) and Imagine Canada wrote immediate responses that pointed out the failure to consider all the facts.

An excerpt from the following day’s rebuttal entitled Statement from Imagine Canada: CBC News coverage on charity fundraising is misleading.

“… To put things into context, the amount of donations over five years referred to by the CBC represents less than 1% of the approximately $86 billion raised by charities over this period. Moreover, the report focuses on 0.3% of the over 85,000 charities in Canada. “The CBC coverage may have left Canadians with the belief that charities calling upon the services of third-party fundraisers are necessarily doing something wrong. That is not the case. Not only is it legitimate to use third-party fundraisers, but if done right, in certain circumstances, it may be a more efficient and effective way of using limited resources”.

Imagine Canada also mentioned their Ethical Code Program and handbook.

In Karen Willson’s response as president, AFP Greater Toronto Chapter she cited the Code of Ethical Principals and Standards that we as members are bound by and the Donor Bill of Rights in which we adhere.

She went on to say …

“Cost per dollar raised has become the accepted simplistic measure of a “good” charity. The general perception is that the lower the cost per dollar raised, the better the organization. It is important that fundraising activities and the costs associated with them be viewed holistically as opposed to making judgments based solely on one activity. Each fundraising activity has particular goals and depending on the nature of the activity, more or less cost. For instance, activities that involve acquiring new donors have higher costs. Special event activities also have a relatively high cost, but often are one of the few ways organizations can build awareness. So when judging a charity, look at the mix of all their programs.”

Karen’s full letter can be found on the AFP website.

Similarly, in his role as chair, Canada Council AFP, Mark Climie-Elliott responded to last June’s Charity 100 MoneySense edition where he stated …

“First, the 35 percent figure used by The Charity 100 and others for fundraising costs isn’t based on any sort of research. In fact, research by the Nonprofit Overhead Cost Project shows that fundraising costs legitimately vary widely by type of organizations and type of fundraising. And the Canada Revenue Agency (CRA) itself says that “[f]undraising ratios alone are not determinative in assessing whether a charity's fundraising complies with the requirements of the guidelines in this guidance.”

The guru on fundraising costs is a US based expert named James M. Greenfield. The bottom line is, it’s almost impossible to compare an apple to an apple so the best thing we can do is look at industry standards. However, that doesn’t flesh out the difference between fundraising for a church (with its built in congregation) or hospitals and universities (with their “alumni” members) compared to your particular charity.

Additionally, many charities don’t analyze their costs according to the particular method they’re using. That’s a basic first step to truly understand which methods have the best return on your investment.

Here’s a summary of Greenfield’s “Reasonable Cost Guidelines”:

Direct Mail Acquisition/Constituency Building
$1.25 to $1.50 to raise $1.00
Plus a 1% rate of return on all lists used in the mailing
Direct Mail Renewal/Constituency Retention
20 – 25 cents per $1 raised
Plus a 50% rate of renewal among donors of the previous year
Benefits and Special Events
50 cents of gross proceeds per $1 raised
Corporate and Foundation Solicitation (Grant Writing)
20 cents per $1 raised
Wills and Estate Planning
25 cents per $1 raised (plus a lot of patience)
Capital Campaign and Major Gifts
5-10 cents per $1 raised

A 1996 one-time study conducted by the Canadian Centre for Philanthropy (now Imagine Canada) entitled Charitable Fundraising in Canada: Results from a National Survey of Fundraising Practices of Canadian Charities found the average cost to raise $1.00 was $0.26. Unfortunately there is no updated version of this research in Canada.

Ideally, all of the following four measures are needed to assess the success of each fundraising method mentioned above:

  • Percentage rate of return — number of solicitations made divided by replies received
  • Average gift size — total contributions divided by number of replies
  • Average cost per gift — divide fundraising costs by number of replies
  • Overall cost percentage — divide fundraising costs by total contributions and multiply by 100
  • To calculate the cost to raise money the formula is “FC=E/GR” (Fundraising Costs equals expenses divided by gross revenue)...if you spent $2500 and generated gross revenues of $10,000, your fundraising cost would be $.25 for every dollar raised.
 

What gets counted?

CRA states “Fundraising expenditures include all costs related to any activity that includes a solicitation of support, or that is undertaken as part of the planning and preparation for future solicitations of support, regardless of whether the solicitation of support occurred.” In circumstances where a receipt is issued for any part of a transaction, the activity is deemed to be a solicitation of support and therefore the costs associated with the entire activity must automatically be allocated to fundraising expenditures.

Considering the CRA Fundraising Guidance now pertains to all Canadian registered charities you’d think we could draw comparisons. However, with this policy being relatively new and subject to interpretation we’re making progress but not there yet. Here are some questions to spark dialogue in your organization:

  • How does the charity factor in its facility costs into the equation?
  • Have you counted a percentage of the chief executive’s salary who solicits major gifts?
  • Are there start-up costs for a particular campaign?
  • If you made a one-time investment for donor acquisition that you expect to see returns upon over a three-year period, how would you count that cost?
  • Where do you allocate the costs of the administrative assistant who issues charitable tax receipts — under Fundraising or Admin?
  • How do you count the direct and indirect IT costs that support your development program?
  • Have you traditionally netted out your special events before reporting the numbers to the public?
 

If any of these questions resonate I would recommend that you ask Canada Revenue Agency how they expect the costs to be counted. Generally speaking, they require your charity to be as transparent as possible. Call them at 1-800-267-2384 or visit the Charities Directorate website.

A charity challenge

After the CBC article last month I went to their website and was horrified to read the naïve comments that audience members were making. The general message was “I’ll never donate again!”

It’s our duty as Canadian registered charities to be as accountable as possible with public and private sector support. We also need to help educate our board members, volunteers and donors about the true costs of fundraising...which we can control...with their help! As long as we stretch the truth we sabotage our own effectiveness.

Cynthia Armour is a freelance specialist in fundraising and governance. A Certified FundRaising Executive (CFRE) since 1995, she volunteers as a subject matter expert with CFRE International. She works with boards and senior staff to ensure that strong leadership will enhance organizational capacity to govern and fundraise effectively. Contact Cynthia directly at 705-799-0636, e-mail answers@elderstone.ca, or visit www.elderstone.ca for more information about her services.

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