In the previous chapter, we introduced you to the overall concept of building resilience for your nonprofit. Next, we will focus on some aspects of fundraising resilience, which is key to most nonprofits since many rely on either government grants or donors to consistently deliver on programs. Some nonprofits can rely on earned income, especially those in the education or medical service provider sectors. According to research cited in this June 2024 from the Stanford Social Innovation review, 30% of the large nonprofits in the data set relied on program services/earned revenue as their primary source of funding and two-thirds of those nonprofits are in the education or health care sectors which are also a natural fit for government grants.
What is fundraising resilience and how do you determine if your nonprofit has a resilience source of funding over the long term?
Fundraising resilience can be defined on the ability to both diversify an organization’s revenue sources and to track and measure these sources. Two ratios can be used to determine your reliance:
- Government Reliance Ratio: If your organization receives government grants, you can compare your government revenue to your organization’s total revenue. This can be especially important if government support is declining in your particular sector or region. A high score indicates that your organization is less likely to maintain programs funded by the government.
- Core Funding Reliance Ratio: This ratio compares the organization’s largest funding sources against total revenue. By determining this ratio, you will understand how much of your budget is dependent on core funders. Divide the amount of core funders by your organization’s total income.
By tracking either or both ratios, you can determine whether your organization has an unhealthy dependence on a single funding source. This can also help your organization determine which programs might be at risk depending on the volatility of that funding source. By diversifying or adding additional funding sources, your organization can mitigate these risks.
Several years ago, I was on the board of an organization that relied heavily on local government grants in addition to foundation and individual giving. The organization seemed to have diverse sources of income. However, government grants often must be used for very specific purposes and programs and allocated within an organization accordingly. Unfortunately, the organization did not have strong financial roles within the organization and the Finance Committee was often playing catch-up from month-to-month, not realizing that un-funded programs and leadership roles within the organization were relying temporarily on these government grants, until they could secure unrestricted donations and develop an earned income stream. When the unrestricted grants and individual donations took longer to materialize, the organization was forced to use its reserves to “pay back” the government funds that were temporarily used. This put the nonprofit in a very precarious financial position. Luckily, the organization was able to recover from this financial dip, however some programs were permanently shuttered, staff were laid off and the organization shrank its impact in the community.
Could this situation have been avoided? Yes, by having visibility into the organization’s reliance on specific sources for specific programs, the board and staff leadership could have seen the precarious situation sooner and addressed it through more fiscal discipline and diversification of unrestricted fundraising dollars. In hindsight, the board could have recognized the need to build a larger reserve before approving a program that would ultimately be self-sustaining through earned revenue but needed a longer runway to make that happen.
A second measure that many organizations like to use is the “Cost of Fundraising” Ratio.
Why is this important? Too often, organizations get hung up on traditions of hosting certain types of fundraisers or events that don’t yield high results. For example, a nonprofit may host an annual gala with a seated dinner, live auction and dancing. While this event may be fun and glitzy for board members and donors, the impact of time and resources on the organization plus the upfront costs may not result in a high yield to the organization.
You could argue that an annual gala or dinner is part of community-building or “friendraising” that will ultimately lead to more donors and donations. By measuring the cost of fundraising, your nonprofit can determine where best to put its precious resources.
Start by determining your organization’s fundraising expenses (including staff salaries & benefits) versus how much your organization brings in the form of grants, government funding and individual or foundation funds. Historically, organizations have been criticized for spending too much on administration or overhead and not enough going to programs. However, this has changed in the past 5 years as both foundations and donors recognize this has created a starvation-cycle within the nonprofit sector such that staff are paid too far below median wages and organizations are constantly playing catch-up in terms of infrastructure. This was laid particularly bare during COVID, when many nonprofits found themselves unable to collected earned income and not having sufficient reserves to ride out the inability to host fundraisers during the height of the pandemic.
What is a good fundraising ratio?
Again, this may depend on the circumstances of your nonprofit. A rule of thumb is 35% — if your organization is spending 35% or less to fundraise, then you’re likely doing an efficient job with your efforts. However, newer or startup nonprofit organizations may have to spend more during the early years as it’s harder to be awarded grants and unrestricted donations without a longer track record. These newer nonprofits may spend money on grant writers and consultants and not see the donations come to fruition for a while. This will take patience and support from your board members while your organization continues to implement its strategic plan.
We highly recommend building these ratios into your regular board reporting process. By being transparent with your board and ultimately, your bigger donors, you can enlist their support for both decreasing fundraising reliance and to maintain a reasonable fundraising cost ratio. It’s important to ensure your board is educated on the appropriate benchmarks for organizations in your sector as well as the types of fundraising you will be doing.
For example, one form of fundraising that provides the highest return on investment is a planned giving program. These programs can be relatively low cost with an annual letter campaign, seminars for prospective donors on estate planning and general cultivation activities. However, a planned giving program takes time to implement and cultivate, several years in fact, before an organization may see the fruits of its labor. Some organizations and boards may lack patience in supporting a longer-term program as it requires a dedicated campaign and a portion of development resources.
Another resource and budget-intensive fundraising program is a capital campaign. This can be a challenge for organizations with a small development team or a lack of experience with capital campaigns. This type of fundraising program often requires the hiring of consultants to perform a feasibility study with donors, board members and volunteers who are willing to engage in donor conversations and the skills of bankers and investment managers to consider how any gaps in the campaign will be filled to accomplish the capital project.
How Do You Engage Your Board and Prospective Donors?
As we mentioned above, it’s important to engage the board when developing ratios and creating transparency around your organization’s fundraising practices. The best way to start is with background and education on what these ratios mean, why they are important and what your peer organizations are doing in this space –whether as a benchmark to achieve or a cautionary tale. Once you have engaged the board in education, the next step is to engage them in monitoring and tracking of the ratios with regular board updates. There is an opportunity to share details on the costs of your organization’s fundraising and seek support from these important donors on how to message it with external, prospective donors.
Once you have gotten feedback from your Board and reviewed the messaging to prospective donors with them, it is time to develop your messaging for prospective donors. Many donors have no idea about fundraising ratios, cost of fundraising or fundraising efficiency. They may only know what others have told them or what they’ve read in the media. For many years, the “overhead ratio” was a big deal to donors and had many questioning an organization’s administrative or “overhead” costs such as salaries, rent, software licensing versus direct program expenses. Through a concerted campaign, organizations such as Guidestar (now Candid), BBB and Charity Navigator worked to bust this myth since the overhead ratio is highly dependent on the sector, size and area of nonprofit plus it’s difficult to get at this ratio unless you investigate an organization’s financials much more deeply.
That is why more specific ratios such as cost of fundraising, government reliance ratio and core reliance ratio are more helpful in sharing with donors and prospective ones. This is an opportunity to share your organization’s challenges and successes. For example, you may share that your organization is heavily reliance on government grants and therefore you are asking donors to give larger, unrestricted donations at an individual level to decrease your organization’s reliance on government grants or to enable your organization to have a reserve in case those grants are delayed due to a government shutdown or other economic conditions.
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