Debunking the Overhead Myth and Measuring Fundraising Effectiveness

Debunking the Overhead Myth and Measuring Fundraising Effectiveness

Over head the four letter word X 2 2

OVERHEAD At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity s financial and organizational performance does more damage than good. 3

Starving the Sector Stanford Social Innovation Review has called it The Nonprofit Starvation Cycle. We starve charities of the freedom they need to best serve the people and communities they are trying to serve. 4

Nonprofit Overhead Cost Study The researchers examined more than 220,000 IRS Form 990s and conducted 1,500 in-depth surveys of organizations with revenues of more than $100,000. Among their findings: Nonfunctioning computers, Staff members who lacked the training needed for their positions, Furniture so old and beaten down that the movers refused to move it. The effects of such limited overhead investment are felt far beyond the office: nonfunctioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries 5

Infrastructure Organizations that build robust infrastructure which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead are more likely to success than those that do not. 6

What is overhead The Amount of total receipts spent on administration and fundraising, in contract to the amount spend delivering services 7

Two Perspectives of Overhead THE CHARITY Overhead is a critical investment, necessary to generate future income, pay qualified staff and ensure the future sustainability of the organization DONORS Overhead is the amount of their donation directed away from the cause and lessens their impact 8

And then there is the media A non-profit executive was stating that they would be providing a full accounting next week of the funds that had been raised and spent in the relief effort for Hurricane Harvey. The reporter then asked, with a note of incredulity in her voice wouldn t that be the same? Beyond the pictures of dramatic rescues and volunteers serving food there is a nonprofit infrastructure that makes it function and that, too is worthy of our support and recognition. 9

But the public doesn t know what else to use.

We Have Taught the Public That Overhead is Evil 11

Wounded Warrior PRE STEVE NARDIZZI $24 million raised 2 YEARS WITH STEVE NARDIZZI $326 million raised 80% to programs & services $19,200,000 for programs & services 65% to programs and services $211,900,000 for programs & services 12

MYTH: Charities who invest less in overhead and more in programs have more impact on their mission FACT: The pressure to keep overhead low had meant charities under-invest in critical infrastructure which destabilizes their ability to achieve impact 13

MYTH: Overhead is a good way to compare charities because it gives us a standard measure of their impact FACT: Overhead is a flawed measure and has nothing to do with impact In fact, it often encourages erroneous reporting 14

The Nonprofit Overhead Cost Project 37% of nonprofits with at least $50,000 in revenue report zero fundraising costs 13% claimed zero management costs Salaries represent the largest single cost, but many nonprofits did not report or attribute salary cost accurately 15

MYTH; If a charity invests less in fundraising in any given year, it means it can invest more in its programs Fact: Fundraising costs can increase a charity s overhead ratio and contribute more to the mission 16

MYTH; If a charity invests less in fundraising in any given year, it means it can invest more in its programs PRE STEVE NARDIZZI $24 million raised 2 YEARS WITH STEVE NARDIZZI $326 million raised 80% to programs & services $19,200,000 for programs & services 65% to programs and services $211,900,000 for programs & services 17

Time to Shift the Conversation 18

Busting The Overhead Myth Campaign 1. Demonstrating ethical practice and sharing data about performance by informing donors about their goals, strategies, management, and governance. 2. Managing toward results by using performance-based management systems and understanding the true costs of achieving their mission. 3. Educating donors, especially in fundraising materials, about how they accomplish their charity work and not spotlighting financial ratios as a major way to confirm trust. 19

IMPACT Each year thousands of students, both local to the program site and visiting from around the world, join EPI on multi-day field courses. Our courses combine handson field science and conservation, inquirybased learning, and authentic cultural exchange that inspire and empower youth to take an active role in conservation. 30,000 Teens & Teachers have participated in EPI programs. More than 70% of our participants are underserved youth living near our project sites. 20

Impact Aim High 8:1STUDENT TO TEACHER RATIO 70%TEACHERS OF COLOR 25%OF FACULTY ARE AIM HIGH GRADUATES 98%OF AIM HIGH ALUMNI GRADUATE HIGH SCHOOL ON TIME AND ENROLL IN COLLEGE In 2017, our 2,185 students gained access to: 10,000hours of outdoor education 45,600healthy meals 35visits to local companies 150afternoon activities 330,000minutes read in great books 300,000hours of academic and enrichment activities 21

Nepal Earthquake: Where d the Money Go Three Month Report - Nepal Aid Delivery Direct Relief Of the total Nepal-designated donations received to date, Direct Relief has spent $2,700,365 or 49 percent on the following earthquake response activities: $710,699 to mobilize, transport, and deliver to health facilities more than 144 tons of specifically requested medical material valued at $28,982,827 a ratio of $40 in medical aid for each $1 spent. This expense would be significantly higher, were it not for the emergency airlifts donated by FedEx and in-country logistics provided free-of-charge by the World Food Program and the UN Humanitarian Air Service. $197,682 to purchase urgently needed, specialized medical equipment and supplies (including ventilators, digital x-ray machines, and surgical kits for orthopedic repairs) requested by the Government of Nepal or individual facilities, and $1,791,984 to support in the form of financial grants to organizations and health facilities in Nepal, outlined below urgently needed services in the immediate term and to begin rebuilding or expanding essential services needed in the months and years ahead. 22

Our generation does not want its epitaph to read: We kept charity overhead low. 23

Measuring Fundraising Effectiveness: A Conversation Guide

The Board s Role in Fundraising

That means tackling these big questions: Are we investing in growth? Are our fundraising practices ethical? Do we have enough support to fund our mission?

But the most common measure of fundraising effectiveness the so-called cost of fundraising will not answer these questions for us. All it tells us is how much money we spend to raise a dollar.

But the most common measure of fundraising effectiveness the so-called cost of fundraising will not answer these questions for us. All it tells us is how much money we spend to raise a dollar.

There s a better way. A new framework for measuring fundraising effectiveness has been developed by leaders within the nonprofit sector who understand fundraising and what it takes for a nonprofit to succeed.

The Three Most Important Measures of Fundraising Effectiveness Total Fundraising Net: Are we raising enough money to fund our mission now and in the future? Dependency Quotient: To what extent are we dependent on a small number of large-scale donations? Cost of Fundraising: How efficiently are we raising funds, and are our overall efforts achieving high return on investment?

Dependency Quotient as a Measure of Risk What percentage of our budget would be unfunded if we lost our top five donors? 15% 50% 90% How much is too much?

Balancing Risk & Reward: There is an inverse relationship between the dependency quotient and cost of fundraising. Low Cost of Fundraising Not paying for broad outreach Low Dependency Quotient Support from lots of donors or High Dependency Quotient Dependent on a few big donors High Cost of Fundraising Paying to reach them

The Goal Enough Money to Fund Programs (total fundraising net) Healthy Fundraising Program A Responsible Balance of Risk and Reward (Dependency Quotient & Cost of Fundraising)

Calculating Fundraising Measures My Organization s cost to raise funds Fundraising Program/Tactic Total Amount Raised Cost of Staff Time to Raise It Other Associated Costs Program Nets Program COF Overwrite the sample numbers and add as many lines as needed. Gross amount raised by each strategy/program over the past 3 years Calculation of amount of staff costs for each program/strategy. Don't forget to include all the staff members who were involved; not just those who led the strategy. This may involve some estimations if you don't track time by each program or tactic. All other costs associated with raising the funds - could include printing, event costs, meeting costs, etc. The amount each strategy or program contributes to the organization's bottom line. The amount it costs this program/strategy to raise one dollar. Annual Fund $ 204,509 $ 183,610 $ 76,700 $ (55,801) $ (4.66) Special Events $ 220,747 $ 285,040 $ 131,500 $ (195,793) $ (2.13) Major Donor Program $ 1,150,450 $ 108,525 $ 3,800 $ 1,038,125 $ 0.11 Corporate Sponsorships $ 172,180 $ 12,000 $ 500 $ 159,680 $ 0.08 Grants $ 506,021 $ 37,125 $ 500 $ 468,396 $ 0.08 Other $ 110,603 $ - $ - $ 110,603 $ - Subtotals (for entry into powerpoint) $ 2,364,509 $ 626,300 $ 213,000 $ 1,525,209

Calculating Fundraising Measures Dependency Quotient Total contributions for past 3 fiscal years Total contributions for past fiscal year Top 5 Sources of Revenue Should be based on giving over the past 3 years Donor 1 $ 270,000 $ 90,000 Donor 2 $ 200,000 $ 150,000 Donor 3 $ 107,825 $ 35,625 Donor 4 $ 83,100 $ 30,000 Donor 5 $ 66,213 $ 26,213 Total Contributions $ 650,813 $ 331,838 Total Organizational Expenses Past 3 fiscal years Past fiscal year $ 30,830,243 $ 12,982,763 Annual Dependency Quotient 2% 3%

RVNA s Fundraising Measures Total Fundraising Net 1,525,209.26 The total number of dollars your fundraising efforts yielded in support of your mission. Overall Dependency Quotient 2% The percentage of your organizational expenses that are dependent on your 5 largest donors. Overall Cost of Fundraising 0.55 The amount your organization spends to raise one dollar.

Drilling Down: Lower Dependency Quotient/Higher Cost of Fundraising Program is healthy and well-balanced with focus on where the money is not spending where it is not. Organization has a lower dependency quotient Its fundraising costs are in outreach areas to identify new donors They are investing heavily in fundraising programs and building up diverse sources of funding. They are not particularly dependent on any particular donor. It is good news, but can cause a higher cost of fundraising because of its diversification.

Questions to ask: Are we seeing long-term ROI from our broad-based donation programs, such as direct mail or telemarketing? Are we fully leveraging opportunities to encourage donors to engage more deeply with us through our major gifts and annual programs? Are we addressing opportunities to go after large-scale gifts from foundations or corporations?

INFLUENCE * INCREASE * IMPACT Danosky & Associates helps nonprofit organizations build the capacity to move their strategic vision forward with a solid foundation and an army of support behind them www.danosky.com info@danosky.com 860-799-6330