Research Findings on the Cost of Fundraising Thomas H. Pollak Center on Nonprofits and Philanthropy, The Urban Institute 2004 MIP User Conference * * * * * October 2004 Austin, TX

The Project Nonprofit Fundraising & Administrative Costs: Assessing Current Practices & Developing a Framework for Reporting Understand scope & sources of variation in fundraising & administrative costs, & identify problems or inconsistencies in their measurement and reporting Develop & disseminate accessible reports, tools, & guidelines to public, practitioners & policy-makers Initiate a fact-based dialogue on how to ensure comparable & uniform reporting of these costs

Multiple Research Phases Analysis of IRS Form 990 data, n=228,000 Survey of fundraising and accounting practices, n=1500 Detailed case studies, n=9

Research for Decision-Making Do you have the right staffing and resources for the job? Are we missing opportunities to improve our fundraising? Is there something that the more successful organizations do that we don’t? Help nonprofits and their funders understand what it really costs (including staff time) to raise money using different fundraising methods Other long-term benefits from comparable high- quality data on fundraising costs

Findings from 990 Analysis 37% of organizations with more than $50,000 in private contributions reported zero fundraising and special event costs Of those reporting costs, more than ¼ received more than $15 for each dollar spent on fundraising The median was $5.40 Another quarter of organizations received less than $2 for each dollar spent

Perils and Limitations of the Research What are we really measuring? Are organizations reporting consistently? Broad analyses is no substitute for local knowledge The cost of changing methods: Don’t tinker with what works

Case Study Design Goal: ten case studies Diverse org. types, sizes and locations 3 reporting zero fundraising costs “Best practice” sites Draw from survey respondents Review 990s, surveys, and audits Onsite interviews with CEO, CFO, CDO

Interview Protocol, CFO (2 hr) Sources and uses of funds –Restrictions, fundraising methods, admin coverage Functional expense tracking –Joint costs, time tracking, allocation method and rationale Infrastructure costs –Who pays, adequacy, perceived pressure to keep low External reporting: audit and 990 Internal financial management –Budgeting, internal reports, distribution, “appetite” Finance department – staffing, technology, outside supports

Interview Protocol, CEO (1 hr) Financial management –Who’s involved, what they see, how often, how it’s used, finance dept. Fundraising and Development –Information available for management, development dept. Covering admin infrastructure –Difficulty, adequacy, gaps, reporting pressures

Interview Protocol, CDO (1 hr) Sources of funding Methods of fundraising used Management and coordination of methods, people involved in F/R Department staffing, technology, outside supports Planning and information to manage F/R –Costs and revenues Raising money for admin infrastructure Perceived pressure to keep admin costs down

$1M Domestic Abuse Agency 2/3 revenue contributed, 1/3 govt. contracts, no development staff, CEO very involved in F/R A few corporate board members deliver significant special event sponsorships and program grants UW, newsletter, corp and foundation grants, thrift shop No personnel costs for F/R on audit or 990

Domestic Abuse Agency, cont’d “I’m not an accountant, but I play one at work.” Functional expense reporting “a work in progress;” no time tracking by functional expense area “On M&G, our auditor says there’s no definition. You can do whatever you want.” 990 prepared by auditor

$5M Community Development Corp 70% program service revenue, 30% contributed 2 FTE development department Foundation grants, corp support for spec events, annual appeal, newsletter, UW Senior execs deeply involved in fundraising, but no salary allocated to F/R

$5M CDC, cont’d CFO plus 3.5 FTE accounting department Staff assigned to cost centers, cost centers assigned to functional expense categories –No time tracking by category –Anything not at the parent is “program” Auditor prepares 990 Lack of infrastructure funding handled by paying low salaries and doing without

Literacy Agency of Arguable Size 50% revenue from govt., 45% contributed 1 development person plus vol. coord. CEO very involved in F/R Foundation grants, UW, spec. events, mail appeals and newsletter, local corps. Development person charges time to program to keep F/R ratio down Grant budgets avoid “too much” in certain line items and all hard-to-explain line items, focus on direct program costs

Literacy Agency, cont’d Use of volunteer tutors means a $1.1 million org on audit, $400K org on 990 Admin and F/R ratios a “wasteful” 30+% based on 990, “efficient” 12% based on audited financials –Agency has been threatened with cutoff by a funder using 990 No trained financial staff person; 1 admin director Timesheets support allocation by functional expense category

Literacy Agency, cont’d Class Z office space, very junior staff, cast-off furniture, etc. Lack of infrastructure funding handled by paying low salaries and doing without

$2.5M Food Bank 60% govt funding, 40% contributed 3-day/week grantwriter; CEO relationships important to many funding sources Foundation grants, spec. events, newsletter, UW, churches, local corps. Zero fundraising cost on 990 was “a mistake” All admin staff share one office, roof leaks, broken furniture Low salaries: “We couldn’t replace X for what we pay her.” “The advantage of running a thrifty organization is that you continue to get support.”

Food Bank, cont’d $2M food donations, $500k cash expenses 2.2 FTE admin and F/R staff allocated across functional expense categories by fixed percent; no time tracking 990 prepared by contract accountant Change in food inventory led to $250K surplus and deficit in adjacent years Donations for capital purchases led to phony “operating surpluses”

$40M Diversified Human Services Agency 80% govt., 10% contributed, 10% other program service CDO has 7 reports Senior execs heavily involved in govt funding, in other F/R as orchestrated by dev. dept. Board, spec. events, foundation grants, corps., planned and major gifts, newsletters Zero fundraising cost on 990. No one noticed.

Diversified Human Services, cont’d CFO has 27 reports Auditor prepares 990 Functional expense breakout on audit; Staff charged to cost centers, cost centers charged to functional expense categories. No time tracking by category. “What would be the benefit?” Primarily public sector funding; percentage for admin ranges 0-15% 600 employees, 40 locations: no backup for 1-person payroll, benefits, phone support, and network support No evaluation, internal audit, or quality improvement

Conclusions Functional expense tracking of personnel time low priority, low perceived benefit Glaring 990 errors even when prepared by auditors, CPAs NPOs responding to perceived pressure to keep real and reported M&G but esp. fundraising ratio low Fundamental issues with GAAP and 990 rules for donated goods and services, and capital gifts

Conclusions, cont’d Personnel costs in fundraising are generally not tracked Relative costs of different fundraising methods are generally not considered in the management of fundraising NPOs generally classify gov’t funding as direct public support on 990, but do not classify costs of raising those funds as fundraising costs

Conclusions, cont’d Hard to raise adequate funds for admin. infrastructure at all sizes NPOs responding with varying mixes of paying low salaries and doing without “You get what you pay for” with infrastructure

Survey Questions Use of staff and volunteers Use of fundraising information systems Fundraising methods Auditing and cost allocation Professional fundraisers Standards & requirements of donors & others Indirect fundraising by affiliates or federated funding orgs.

Research Question Are some fundraising strategies more efficient than others? I.e., do they generate more direct contributions per dollar of fundraising expense?

Survey Results Mailed surveys to 3,000+ NPOs 1,500+ returned (51% response rate) Sample was stratified random sample: –Stratified by: Size & Subsector Sample and responses both closely mirror overall nonprofit sector.

Survey Results: General Caveats and Concerns Surveys always have several sources of possible bias: Non-responders may differ from responders systematically in important ways. Item non-response bias among responders. Veracity of responses. Perceived incentives to respond.

Survey Results: General Caveats and Concerns Not always clear whether responders declared costs in a consistent manner: Direct costs (printing and postage) Direct labor costs Indirect labor costs (CEO, etc.) Indirect costs (rent, utilities) Gross vs. net revenues for special events and mailings, etc.

Means, Medians, 1st & 3rd Quartiles: An Example

Special Events Pct using this method (among fundraisers): 60% Number of complete responses: 540 –Mean: 9.1 –Median: 3.2 –25 th & 75 th Percentiles:

Special Events

Direct Mail Pct using this method (among fundraisers): 59% Number of complete responses: 541 –Mean: 36.4 –Median: 10 –25 th & 75 th Percentiles: 4.5—25.9

Direct Mail

Telephone Calls Pct using this method (among fundraisers): 23% Number of complete responses: 61 –Mean: 54.7 –Median: 11.9 –25 th & 75 th Percentiles:

Federated Fund Raising Pct using this method (among fundraisers): 21% Number of complete responses: 80 –Mean: –Median: 28 –25 th & 75 th Percentiles: 7.9 – 63.3

Pct using this method (among fundraisers): 4% Number of complete responses: 10 –Mean: 17.6 –Median: 7.5 –25 th & 75 th Percentiles:

Web Pct using this method (among fundraisers): 17% Number of complete responses: 24 –Mean: 8.8 –Median: 7.0 –25 th & 75 th Percentiles: 1.8 – 10.0

Congregations Pct using this method (among fundraisers): 16% Number of complete responses: 64 –Mean: 50.3 –Median: 18.0 –25 th & 75 th Percentiles: 6.1 – 60.3

Door to Door Pct using this method (among fundraisers): 3% Number of complete responses: 11 –Mean: 42.1 –Median: 10.0 –25 th & 75 th Percentiles: 5.0 – 77.0

Foundation Proposal Writing Pct using this method (among fundraisers): 64% Number of complete responses: 324 –Mean: 6.90 –Median: 20 –25 th & 75 th Percentiles: 7.7 – 60.0

Foundation Proposal Writing

Government Proposals Pct using this method (among fundraisers): 53% Number of complete responses: 287 –Mean: –Median: 27.5 –25 th & 75 th Percentiles: 9.5 – 102

Government Proposals

Major Gifts Pct using this method (among fundraisers): 30% Number of complete responses: 124 –Mean: –Median: 24.0 – 25 th & 75 th Percentiles: 8.4 – 100.0

Major Gifts

Capital Campaigns Pct using this method (among fundraisers): 16% Number of complete responses: 79 –Mean: 427 –Median: 20 –25 th & 75 th Percentiles: range: 8.0 – 53.8

Planned Giving Pct using this method (among fundraisers): 20% Number of complete responses: 80 –Mean: –Median: 20.0 –25 th & 75 th Percentiles: 7.8 – 100

Conclusions Fundraising Methods matter. They have different returns on investments. Other project research using Form 990 data found similar results: methods matter. Also found that the cost of fundraising varies by size and subsector quite a bit and by age a little. Still much unexplained.

Next Steps Work with fundraisers, CPAs, and nonprofits to improve their understanding of reporting potential and problems Improve the quality of reporting so that more detailed information can be used for better decision-making in the future

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