How Much Does Fundraising Really Cost?
If you want to raise more money for your nonprofit, it is critically important that you calculate the return on investment of every revenue-generating activity your nonprofit undertakes. This can be fairly easily understood through two basic calculations. If these two formulas were applied to every moneymaking effort a nonprofit engages in, organizations could quickly determine which activities are most profitable and reallocate scarce resources accordingly.
The first calculation is net revenue. Net revenue is so much more informative than gross revenue. Gross revenue is the total of all money brought in from a fundraising activity (direct-mail appeal, gala, foundation grant, major-gifts campaign). But that figure is meaningless until you understand what it cost you to bring that money in the door. These costs are both direct (the materials required for the activity, the staff that worked directly on the activity) and indirect (volunteer hours, overhead staff time). You only really know how much money you made after you subtract the costs to make it.
Net revenue = gross revenue – fundraising costs (direct and indirect)
Let me give you an example. Let’s pretend that a nonprofit organization with a $500,000 annual budget throws an annual gala with a band, catering and an auction. One staff member spends half her time getting the event together, and a board committee helps sell tables and provides oversight. At the end of the event the organization grosses $100,000. The folks at the organization are thrilled that they have made 20 percent of their annual budget in one night, right? Wrong.
That’s only the gross revenue. What is the net revenue of this gala? The direct expenses for the event (the band, venue, food, decorations, invitations, etc.) cost $50,000. Direct expenses = $50,000
But they also need to factor in the indirect expenses. The event coordinator spent half a year preparing for this event. The executive director attended meetings, made phone calls to invite people and came to the event. The development director worked on the event. And the board committee put in many hours planning, marketing and attending the event. So if we calculate the hourly rate of those staff members' time (salary and benefits) and multiplied it by the hours they each worked, we’d get the cost of their time. We also need to do the same for board members. We can use the standard value of volunteer hours ($21.36) multiplied by the number of board members who worked on the event and the average number of hours they spent. If we add all of this up we get:
- Event coordinator = $15,000
- Executive director = $4,000
- Development director = $5,000
- Board members = $3,000
- Total = $27,000
So the total costs of the gala were: $50,000 (direct expenses) + $27,000 (indirect expenses) = $77,000
And, the net revenue on this event was: $100,000 (gross revenue) – $77,000 (direct and indirect costs) = $23,000
Which brings me to the second critical calculation: cost to raise a dollar. How much did it cost the organization to raise that $23,000?
Cost to raise $1 = costs (direct and indirect) / net revenue
$77,000 / $23,000 = $3.35
So it cost this organization $3.35 to raise $1. That’s not an attractive return, is it?
Although this organization actually made money, the cost of making that money is far larger than the money that came in. And how does the cost of making this money compare to other fundraising activities?
Well, let’s take another example. Pretend this organization hires a major-gift officer at a salary of $65,000 per year plus benefits. Her salary and benefits are the direct costs. The indirect costs could include the executive director’s and board members’ time to go on donor and prospect visits, creation of materials, and the sending of thank-you letters. The total for these direct and indirect costs would be $100,000. Say that this major-gift officer raises $500,000 per year in major gifts. So the net revenue would be: $500,000 (gross revenue) – $100,000 (direct and indirect costs) = $400,000 net revenue
And the cost to raise a dollar would be: $100,000 (direct and indirect costs) / $400,000 (net revenue) = $0.25
So it takes $0.25 to raise $1. That’s a dramatically better return on investment than the gala that cost $3.35 to raise $1 above, isn’t it?
I encourage you to run the numbers on your own fundraising activities and then compare.
- How does your net revenue and cost to raise a dollar compare across activities?
- Which are the most effective fundraising activities?
- What if you poured more effort and resources into the higher-net activities?
More money would contribute to your bottom line, meaning more money to spend on the social impact you want to create.
That could be transformative.