Fundraising ratio, program ratio, percentage of every dollar spent on mission. You’ve heard them all tossed around during this time of ‘impactful philanthropy’ where we want to measure and evaluate all nonprofit numbers and determine who is doing the best job. But what do they mean? And do they matter?
A fundraising efficiency ratio, often referred as ‘the cost to raise a dollar’, is simply the number of dollars spent on fundraising, divided by the dollars brought in through fundraising. This ratio or percentage helps you see if they’re spending exorbitant amounts of money raising funds. The general standard is to see something 80% or higher, but bear in mind, something too close to 100% is probably unrealistic and conversely something below 80% may not be a sign of trouble. Perhaps that year the organization made an investment in fundraising staff because they’re hoping to grow programs in the coming years. In a situation like that, you’ll see a lower fundraising efficiency ratio because the investment in new staff comes before it can pay off. That’s why we believe year over year trends can be more insightful.
A program ratio, often referred to as ‘what they’re doing with our money’, is simply the number of dollars spent directly on programs and services, divided by total expenditures. This can be a useful mirror to their activities. Are they spending the majority of their funds (and therefore resources) on delivering on their mission? Or are expenditures being used in lots of different ways that don’t directly service their clientele? This is certainly a very controversial indicator because the public doesn’t generally like to see high salaries for nonprofit executives, as an example. On the other side of the debate, nonprofits can be multimillion dollar businesses that need to be run just as expertly as for profit businesses. For example, they have to hire and retain the same talent to run these sophisticated and large operations and that means spending on salaries for talented leadership and team members. Check out this full argument described by the controversial but eye opening Dan Pallotta here.
There are a number of other factors to consider, like cash on hand. An organization should be solvent for at minimum three months, but we’re generally more comfortable seeing at least one year in reserves. Just like in your personal or business life, unexpected things happen – computers need software updates, there’s a huge influx of service recipients one month, etc… – and nonprofits should be prepared to float these costs from one month to the next without fearing making payroll.
Another indicator of a healthy nonprofit is the executive staying power. Generally an organization is going to have some challenges under the surface if its had an executive for 20 or 30 years, and similarly, a new executive or a lot of turnover in the C-Suite gives us cause for concern.
Regarding volunteer leadership, we encourage nonprofit boards to expect all members to financially contributes something. This isn’t generally advertised, though many foundations are asking about the percentage of board giving in their applications and we think that nonprofits will start promoting this more.
Lastly, keep in mind when comparing nonprofits, that it’s rarely apples to apples. Different causes have different costs associated with their mission, and not all nonprofits are direct service providers; some are pass through organizations to local charities. A charity’s geographic location, size, and mission should all match up before trying to compare two charities’ fundraising ratios.
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