This is Part 6 of my six-part weekly series on achieving fundraising success for your nonprofit agency. In this last installment, we discuss why you should pay attention to the bottom line.
Pay Attention to the Bottom Line
Fundraising is a mission-related activity. You are raising money to meet mission. You are not raising money for the sake of the organization. The organization is just a vehicle to meet a mission.
Organizations must generate revenue if they are to survive and make mission happen. As a long time development professional and current executive director, it is important to me that my agency generate the revenues I need grow fulfillment of my mission. It is important to me to know what activities are most profitable and what activities I might want to expand. It is crucial that I maintain enough cash on hand to be able to meet expenses, when there are months of more expenses than revenues. It is important to me that I understand the financial concepts so that I make the most informed management decision I can. That I ensure the profitability of my organization. Money is what makes that mission happen.
Often, we think about fundraising as all about raising funds. But it is not. It’s also about calculating costs so you raise enough funds. Total costs, not just direct costs. And it’s about calculating return on investment so you know which fundraising activities bring the greatest return on each dollar you spend. You also have to take into account the timing of when revenues come in and expenses go out so that the organization remains continuously viable. Fundraising is not just about raising money—it’s about what, when, and how, too. Just as important as increasing revenues is what costs you’re incurring in raising those funds, when you expect the funds to come in, and how you decide which fundraising activities to undertake.
Succeed in Your Nonprofit Funding Partnerships: Analyzing Their Costs and Benefits explains how to construct fund development activities so that your agency flourishes financially, that is, attracts the resources it needs to fulfill more and more mission. For example, how many development professionals use their agencies’ chart of accounts to make sure that the development plan completely covers total costs? I know of many organizations who fail to raise enough money to cover costs because they have only taken into account direct costs, and not indirect. Their revenue generation plans automatically put the agency in the red.
To present your agency as a successful business, you must, first and foremost, understand your organization’s financial performance. For-profit companies exist for positive financial performance and know their numbers inside and out. For them to understand what your organization is trying to do, you must speak this language. It’s what corporations understand. More importantly, it’s how they measure success. So if you need to, learn. Know your organization’s asset, liability and equity values. Understand your agency’s cash flow position. Be able to talk about revenues and expenses, as well as gross and net income. Figure out your programs’ unit costs. Know your profit margin. Be able to cite your organization’s return on investment.
In my experience, many people who are looking at implementing a particular fundraising activity only look at how much revenue they can generate. They do not consider their costs. This is a mistake. Fundraising results should not be measured by how much revenue an activity brings in, but how much net income, that is revenues minus expenses, that activity brings in. And not only your direct costs, but ALL your costs – direct and indirect.
Direct costs are those that can be directly attributable to the activity you are engaging in, for example, a direct mail campaign or gala or grant proposal. When you look at the costs of a direct mail campaign, do you consider only the direct costs of printing and postage and maybe an incentive gift? Or do you also consider the indirect costs of the time it takes someone to write the appeal, the time to make sure the mailing list is accurate, address the envelopes and affix the postage? Who is responsible for doing these things? How much do they get paid? Can someone else do it at less cost?
When you develop budgets, go to your agency’s chart of accounts to make sure you’ve budgeted for all costs, not just the obvious ones. When you put together your annual development plan, find out the return on both financial and mission investment so that you can make financially sound decisions on which activities to pursue. Financial return on investment tells you how much revenue you generate for each dollar you spend. Mission return on investment will tell you how much mission impact you are making for each activity you pursue. Both are important.
When looking at the total agency budget, you will be dealing with all of your line items, i.e., your total revenues and costs. However, when formulating program, event and grant budgets you won’t necessarily use all your line items—only those relevant to the specific program, event or grant. However, you still have to pay those costs, whether they are budgeted or not.
For example, in a training budget, it’s very easy to include the direct costs for instructors and training manuals. It’s more difficult to remember a portion of the executive director, rental, phone, and other indirect costs. Quite often, someone does not take indirect expenses into account when planning a program, event, or grant budget. As a result, they don’t raise enough to cover total costs. Always remember to include both direct and indirect costs in your budget calculations.
Because what I do takes into account all direct and indirect costs, I create fundraising targets that exceed total costs and increase our net income. My organization stays profitable and I continue to meet mission. And meeting mission is what nonprofit fundraising is all about.
Cash Flow Might Be an Additional Consideration
Cash flow might be an additional consideration. With the annual budget, we might end the year with positive net revenue. The same may not hold true month by month. There may be many months there is negative net income. To get through these months, I need enough reserves at the beginning of the year to carry me through, to implement another revenue generating activity earlier in the year, to move expenses toward the end of the year, or to tap into other sources of capital, such as a loan or line of credit.
Projected monthly cash flow budgets lay out what revenues are and expenses are expected to be incurred by month. You might need to generate revenues at specific points in time, which might dictate the timing of your fundraising activities. You might want to add a new activity or grow an existing one based on when revenues need to be generated.
How many development professionals are aware of their agency’s monthly cash flow budget? In preparing the annual development plans, do they know how much the agency must realize when?
Return on investment is a performance measure used to evaluate the efficiency of an investment. Financial return on investment is calculated as net income divided by costs and is useful to compare the financial efficacy of one activity over another. In addition to financial return on investment, nonprofits must also consider mission return on investment.
Financial return on investment is calculated by dividing net income by total costs ((revenue-expenses)/expenses). Return on investment tells you which revenue generating activities produce the greatest financial return on every dollar spent on them. The return on investment ratio tells you how well your money is working for you. It lets you know how much revenue you generate from a specific activity for every dollar you invest.
This ratio is particularly helpful when you have to make choices. For example, you can compare the return on investment for growing your gala to putting more resources into grant writing or expanding your annual appeal. Maybe you don’t want to invest in fundraising activities at all but would rather put money in traditional investments. Your decision will not rest solely on the financial return from the investment, but it should be a factor.
Suppose you want to build up a corporate giving program. What are the costs and benefits of doing so? Corporations contribute only about 5 percent of the total giving pie in the United States. Will the revenue you raise be significant or should you put your time into more fruitful money-making pursuits? Or is the benefit of showing broader community support worth the costs of not pursuing that other fundraising activity?
Cost centers are those programs or activities that are so vital to your core mission that they must be implemented, even if they are carried out at a financial loss to the agency. An advocacy campaign is a good example of a nonprofit activity that generates more costs than revenues. A counseling or day care center might offer below-cost services to low-income clients who cannot afford them. In all of these cases, revenues must be generated elsewhere to subsidize and sustain the core organizational activities.
The fundraising activities you engage in, then, need to be an expression of your agency’s mission and values. A good development plan is not a solo activity. It is done with the input of the entire management team under the overall guidance of the strategic plan. An agency’s strategic plan is the guide map for the organization. It defines the direction of the organization. A good strategic plan will lay out the external market and environmental conditions the agency operates within as well as the internal resources available to meet its mission. The plan will contain mission, values, and vision statements. It will tell you where your organization is now, where it wants to go, and how it’s going to get there. Know your strategic plan. Know what direction your agency is headed.
A Good Development Plan Is an Offshoot of the Strategic Plan
A good development plan is an offshoot of the strategic plan. In fact, the development plan might even be part of the strategic plan. The principles, values, and direction outlined in the strategic plan should be the same ones the development plan is striving toward. The two plans need to be consistent with one another so all organizational activities are structured to achieve the same overarching goal in concert with one another.
Your ultimate revenue mix is determined by analyzing both the costs and benefits to the organization as a whole. These costs and benefits might or might not be financial. For example, it is important to consider the impact that implementing certain fundraising activities will have on your brand. Say your organization promotes healthy living; you probably won’t write a funding request to a tobacco company. You will not want to confuse your customers by engaging in partnerships that don’t promote your mission. You will, instead, decide to pursue funding partnerships that will help further your reputation in the community.
An organization with a strong, positive brand will not only function better, it will realize a greater market share. Greater market share can mean greater financial stability and potential for growth. And when growth is managed correctly, it means better financial performance. Which means more resources for you to be better able to meet your agency’s mission. Which, in turn, means a stronger brand. And so on.
Consider Opportunity Costs
You also need to consider opportunity costs. Opportunity costs are the projected costs of implementing one activity over another. These costs might or might not be represented financially. They will not show up in a revenue and expense budget nor will they add to or take away from net income. Determining opportunity costs is, rather, a comparison of the potential outcomes of two or more possible activities.
We take into account opportunity costs every day, if only through how we spend our time. For example, do you spend as much time on a grant for $1,000 as you do for $100,000? Or, how much time do you spend advocating for a piece of legislation that promotes and adds resources to your cause? If the legislation is significant, you might find the costs of getting to know your legislators or studying the legislative process is worth it as opposed to whatever other activity you might engage in. You might consider the long-term benefits of knowing how the political environment works worth more than the short-term benefits of that one-time fundraiser. Or, you might not.
In Fundraising, Money Is Not the Focus, Mission Is
In fundraising, money is not the focus, mission is. But it is important to know inside and out the financials behind your agency’s activities. For without enough overall revenue, your organization will cease to exist, less need will be met, and less mission will be accomplished.