If you’ve ever served on the board of a nonprofit organization, you’ll know how difficult it can be to determine what you should be spending on fundraising initiatives. Mostly, the advice you have to go on is passed on via word of mouth, from one volunteer to the next. However, in cases like these, the ‘facts’ are fairly anecdotal and seldom supported by data.
As a result, there are many charities that are unable to determine what their fundraising efficiency ratio should be. As such, they fail to assess their impact correctly, which hampers the growth of their organizations in the long run.
Every nonprofit organization has certain Key Performance Indicators (KPIs) that they use to work out how effective their activities and fundraisers are. The fundraising efficiency ratio refers to how efficiently your organization has been able to raise money. So, what is a good fundraising efficiency ratio? And how exactly do you work it out?
Nonprofit organizations often face a rather interesting dilemma when it comes to the investment of the charitable funds they have at their disposal. This is because some donors are very focused on seeing the impact of their donations in terms of results. As such, they deem any other expenses as unnecessary or even wasteful.
Although charities aren’t driven by a profit motive, there are still overheads that they need to take into account. Employees have to receive salaries, the charity has to be promoted, and operations have to continue.
While it’s completely understandable that certain donors want to see 100% of their donation going to the end-recipients of the charitable funnel, this can be somewhat short-sighted. After all, if a nonprofit doesn't meet its overheads, it can't continue to do the work it does in the community.
Fortunately, most charitable donors understand that you have to spend money to make money, so to speak. The key lies in providing these generous benefactors with the assurance that their contributions are being put to good use. This is where the fundraising efficiency ratio comes in.
A good fundraising efficiency ratio is one where the money you put into your fundraising efforts is less than the total sum of the donation you collect from it.
When it comes to achieving a good fundraising efficiency ratio, there are a few variables that have an impact. These include:
In short, the expense ratio of big, well-known charities like the American Red Cross or Feeding America are likely to be better than those of lesser-known nonprofits that are still finding their feet in the fundraising space. This is because they already have a wide network of donors and supporters. As such, the funds they raise will likely exceed their expenses by a significant amount.
This is why it’s difficult to determine exactly what is a good fundraising efficiency ratio. A good ratio for international nonprofits will be very different from that of a small, local nonprofit.
As a KPI, the fundraising efficiency ratio serves as a measure of how effectively a charity raises money. The formula used to determine the ratio is as follows:
Unrestricted contributions / unrestricted fundraising expenses = fundraising efficiency ratio (%)
In this instance, unrestricted contributions refer to monetary contributions from benefactors who did not indicate how and when the donations should be used. Unrestricted fundraising expenses refer to money spent by a nonprofit to raise these funds. This includes everything from advertising to the salaries of the personnel, event expenses like catering and venue hire, virtual auctions, and more.
The higher the percentage, the better a charity is objectively doing at raising funds. Anything higher than a result of 1 shows that they are getting more donations than they are spending to get those donations.
The main reason to use this ratio as a KPI is to understand the success of your fundraising efforts. The best way to make sure that you achieve a good fundraising efficiency is to focus on building a large donor base. It’s better to have a lot of different people donating regularly, even if it’s in small amounts.
Otherwise, you will end up with a small base of donors to rely on. And, if one chooses not to donate, it will have a big negative impact on your ratio.
Fundraising efficiency has certain limitations as a KPI. But, there are still a variety of benefits that come with tracking it consistently. These include:
To work out your charity or nonprofit organization's fundraising efficiency ratio, you simply need to divide your fundraising expenses by the funds you raise. By working out this ratio for each of your events or campaigns, you can see how successful your fundraising efforts are.
Used as a KPI, this ratio can be useful at finding out whether your strategies work or not. If you don't have a great ratio, it might be time to try something new and improve your fundraising strategies. You can also use it to measure your progress toward your charity's goals over time.