How much of my dollar goes to the cause? How much is spent on administration? I bet all the money goes to overpaid executives and nothing goes to the cause? All the money gets wasted. I’ve heard them all and more. There’s a strange relationships that goes with these questions though. The amount of enquiry is inversely proportional to the number of people who do any research. If you’re a charity of NFP you need to answer those questions quickly, effectively and honestly.
No-one actually knows what’s the right amount that should be spent on administration in an NFP or charity and it varies so widely based on the business model of the organisation, the target market and the cause. To prove the point, in 2010 an American man reportedly bequeathed (left in his will) $8m to The Wombat Awareness Organisation, a volunteer run South Australian charity. Immediately they would have become one of the most cost effective charities in Australia as their income increased dramatically without significant cost. Therefore everyone with an interest in animal preservation (Wombats in particular) should give money to them due to their fundraising efficiency, right?
Of course not! Now I know nothing about this particular charity and whether they would have spent the money wisely or not, but according to the charity, donations slowed immediately following the news. Decisions were quickly being made with little information about whether they were worth supporting or not, despite the fact that they were now highly efficient fundraisers. So why did people stop giving?
The simple answer to this question is that we don’t donate to people who are better off than us regardless of how efficient they are. Matt Ridley in The Origins of Virtue (1996) makes the point that generosity extends up to the point where we’re no worse off than those we support. It makes sense in this case. We’re not rational in our decision making process. One person thought they were good enough to support while the majority suddenly thought the opposite where the day before they were a good charity to support. Did we decide that they no longer needed our support? Based on what?
All I know is that if you were handing over $10 to a collector on the street that week and one of your friends saw you and had heard the news as well, what would they say? “What are you giving to them for, they just got $8m from some Yank! They’ll have bloody gold plated Toyota Landcruisers by now”. I doubt anyone would have read an annual report or called the organisation to understand how the money would make a difference.
According to a report on the ABC the following year the money may never get to the charity following a legal challenge by the family. So how do we measure their performance now? According to the ‘what portion of my dollar goes to the cause’ question – very quickly they went from a supposedly high percentage to the cause and highly efficient fundraising to lower portion and less efficient, which means we shouldn’t support them, right? I am so confused!
So who should we support?
We’ll get there, don’t worry but now let’s take a look at some scenarios. Consider three charities:
Charity A is a volunteer run charity that undertakes street collections and does a couple of smaller fundraisers every year that attracts the same people.
Charity B is a growing charity that decides to try something significant and invests in a fundraising campaign in 2014, doubling its expenditure. It maintains the campaign into 2015 but income slides but expenses remain the same.
Charity C has a stable income stream through a membership base and a recurring donation from a philanthropic fund. In 2014 it received a one-off donation for $50k as part of a deceased estate.
Now let’s check out their fundraising performance in the tables below.
So from the above information, which charity is most likely to meet its vision? Which charity is the most effective at raising funds? Which charity is the most efficient? Tough huh? It’s difficult to measure the performance of a charity looking at these numbers.
In the corporate world a series of ratios are produced that are industry agreed and they’re used to track performance and compare performance against each other. It’s easier and more relevant because the organisations have the same goal – raise the value of the organisation and that value is determined by financial metrics.
In the charity world though, there’s only one way to know if the charity is performing: It will be continuing to do its work in line with its mission and maybe it’s doing it better than others. The key to understanding that is impact reporting and few are doing that well if at all. (check our post here for more on impact reporting) Right now you’ll have to read annual reports or get in touch with a charity to understand how well it is performing in meeting its mission goals.
When I was asked the ‘what portion of my dollar’ questions I assumed people were talking about fundraising and donating. We hear about charities that spend a lot of money on fundraising activities that deliver very little ‘profit’ to direct to the cause. Sure, a charity might be wasting some money but it must spend money, if it’s not spending money, it’s probably not doing much and certainly nothing of scale. So what’s the point of fundraising ratios to measure performance? We’ll look at the most common fundraising metric, the cost to income ratio.
Cost to income ratio
Let’s look at our three charities from the perspective of someone who asks the question, “what portion of my dollar goes to the cause?” For the media at least, the question is usually answered by reference to a commonly reported figure – the ‘cost to income ratio’ or CIR. The CIR is derived by dividing expenditure by gross revenue and expressed as a percentage. This gives you the answer of what percentage of my donation went toward raising the money. Sounds like a legitimate thing to ask but it’s not. Firstly take a look at the tables below. Note that the answer to the ‘what portion of my dollar goes the cause?’ question lies in the inverse of the CIR. Ie a 30% CIR means than 70% goes to the cause and 30% to the fundraising activity.
CIR is not directly linked to the performance of the organisation because you can only derive a CIR once all the money has come in and all expenditure incurred. Let’s take Australia’s Biggest Morning Tea, a Cancer Council campaign. The bulk of the money comes in around May/June, while the bulk of the expenditure occurs prior to May. The main cost are people costs (to coordinate registrations, media, advertising) the costs of advertising and creating the campaign, postage and packaging of registration materials etc.
If you make a donation in April the costs incurred to date will be much greater than your donation. If you did a CIR calculation in April it would be negative. They will have spent more than they received. Do the same calculation in May or June or July and the numbers will all be very different. Which number do you use and at what time? What if an amazing story runs on Channel 10’s The Living Room one week prior and registrations and fundraising go through the roof. Was the charity more efficient? More effective? Luckier? How do we evaluate their performance against a major humanitarian crisis like a devastating earthquake in Nepal that happens at the same time as the peak registration period?
The challenge with a CIR is that it can look backwards at what happened. It doesn’t tell the full story and a charities future fundraising performance shouldn’t be measured on it. It’s good for measuring internal performance over time to help the charity track and push for greater efficiency – but not at the expense of effectiveness.
Look back up the profit and CIR performance in the table above. What if Charity C had a good PR story in 2014 and Charity B’s fundraising campaign coincided with a major global catastrophe like the 2015 Earthquakes in Nepal? Who’s performance is now better? Who should be punished for poor performance by a withdrawal in donations? What about the poor wombats, no-one asked the wombats if they were better off from a good or bad CIR.
Once you scratch beneath the surface it’s possible to see the deficiency in measuring charity performance using the CIR calculation. Let’s have a look at similar numbers in a different way in what I think is a more appropriate performance measure.
ROI as a predictor of performance
I have been advocating for several years now to see charities report their expected ‘return on investment’ or ROI. ROI is usually determined by dividing profit (net return) by expenditure. Put simply this tells us how much additional ‘profit’ is raised from every dollar spent on fundraising. Ultimately a charity can chose to spend its revenue on primarily two things; mission and revenue generation. If it doesn’t spend enough of revenue generation it won’t have enough to effect its strategy and fulfil its mission. It’s a balancing act.
If you’re a for-profit organisation, you use ROI to identify opportunities that will generate the best value on your assets. They will invest in something that will increase their capacity to generate profit or value. Usually a return of 10-12% per annum is considered a base level return that could be generated through lower risk investments. Put into an ROI format this would be a return of 0.12 : 1 or 12 cents profit generated for every dollar invested. Any return above this is good.
So let’s compare a CIR of 30% with an ROI. A CIR of 30% equates to an ROI of 2.3 : 1. So for every dollar spent on fundraising the charity got $2.33 back to spend on mission or further revenue generation. From a business perspective that’s good, in fact, that’s bloody great.
Using ROI puts charities into a forward looking position. If it has some money in the bank it can chose to invest in one of its fundraising campaigns that will generate a return better than the bank or current investment portfolio returns. If it does this then it’s going to get closer to achieving its mission. Charities after all are there to achieve their mission.
So where does this leave the donor or fundraiser? In terms of charities A, B or C in the tables above let’s have a look at them with ROI as a measure.
So this can tell us a couple of things. If the charity is focused on its mission and achieving it as fast as possible then Charity A should be chastised for being lazy. With a rate of return of 9:1 why is it not investing in doing more fundraising? It’s CIR says it’s efficient but when you look at what it’s doing to achieve its mission, clearly there’s not enough being done to bring in the net revenue (profit) to achieve this.
Charities that play it safe and try above all else to protect assets are more likely to be lazy in achieving their mission. The boards on these charities are often highly risk averse, devoid of marketing or business development expertise, determined to do nothing wrong. These boards often fail to consider the greatest charity risk – not meeting its mission. We don’t need lazy efficient charities. Give us more dynamic, effective charities who are driven by achieving their mission.
So in summary, invest in charities that are determined to succeed in their mission. Consider the CIR of a charity to understand how they went in their last 12 months and look at the expectant ROI of future activities. If they are not delivering a good CIR year on year or meeting their ROI expectations then maybe they have the wrong strategy, wrong team or they’re lazy.
If they are not investing heavily enough in income generation when they have a strong ROI then you can bet they’re not in a hurry to meet their mission. Avoid them, they’re lazy. The disruptive charities are on a mission, they’re the ones to feed with your support.
The ultimate disruptor
If you’re hot onto the ROI concept, why not get a major supporter or corporate to fund your next fundraising campaign with a maximum return of 14%. They’ll get double or more of the bank rate and you’ll have your campaign costs covered. They can wear the risk but with a better than market return and my guess is they’ll help you to drive it and make is succeed. The ultimate corporate social responsibility exercise that’s consistent with the moral needs of the corporate of generating profit for its shareholders.
That’s what we’re here for – to disrupt! Let’s change the game. Get into bed with ROI and make sure your charity is investing enough to meet its mission.
Keep an eye out for our charity disruptor series to gain an intensive hit of disruptive insights or call us and we’ll work inside your charity to help your team build a dynamic, mission driven strategy.
Want some more insight into how charities have to change? Check out this cracker Ted talk by Dan Pallotta.