In Measuring Overall Fundraising Performance we talked about the difference between gross and net income and how net income is a better indicator of fundraising success than gross income. We also discussed influencing the relationship between the amount of donations and number of donors. In Data that Tells You How Effective You Are with Your Donors, we covered how calculating and tracking your average gift per donor and donor acquisition rates can help guide your resource allocation decisions. We also told you about the drastic effect small improvements in your donor retention rate can make. In Measuring Your Fundraising Costs, we started factoring costs into our decision making, talking about direct and indirect costs, costs to raise $1, and the costs to acquire and retain donors. Measuring Your Marketing Endeavors and Evaluating the Efficacy of Your Processes led us to discussions about marketing concepts and metrics and how, when employed, they enhance fundraising efforts. We covered common website, email, social media, and conversion KPI’s. We also spent time focusing on the importance of testing our processes, soliciting donor feedback, and confirming our perceptions. In this blog, we explore return on investment and profit margin.
Return on Investment
Return on investment tells you how well your resources are financially performing. To calculate return on investment you divide net income by expenses. The ratio expresses what percentage of your gross revenues are devoted to costs. For example:
$100,000 net income for that activity/$20,000 in expenses for that activity = 500 percent return on investment.
In other words, for every dollar you spend, you earn five. You might find a return on investment like this on in your grant writing or individual giving program.
Return on investment is a good financial metric to use when you are making final decisions on how to allocate resources to individual fundraising activities and determining your fundraising mix.
You look at net income first. Which activity yields that most income? Then you look at return on investment to see which activities are giving you the most bang for the buck. If the activities that result in the highest net income are the same activities that give you the highest return on investment, congratulations! You are using the fewest amount of resources to raise the most money. If not, you may want to consider changing your fundraising strategy.
Your return on investment is, as you may have noticed, very related to the cost to raise $1, which we discussed in Data that Tells You How Effective You Are with Your Donors. Before changing your fundraising mix based on return on investment, make sure your cost to raise $1 through your different fundraising activities is near the industry average. You want to make sure that you are not changing your mix to do more of what needs fixing. In other words, you want to eliminate any of the activity’s operational inefficiencies before you allocate resources to do more of it.
Return on investment is a readily understood metric by many business professionals. When you approach business executives to support your organization and its work, highlight the return on investment metric. Return on investment terminology may also be the preferred terminology when you are talking to your board about fundraising performance since many board members are business professionals.
Profit margin is calculated by dividing net income by revenues. Profit margin tells you what percentage of gross revenues are not devoted to costs. In other words, what percentage of gross revenues is profit. For example:
$100,000 net income for that activity/$120,000 in revenues for that activity = 83 percent profit margin.
In other words, for every $1 that you raised, $0.83 was profit. That’s a pretty good margin. Imagine how much money you would raise if all your fundraising efforts yielded that sort of profit!
No folks, profit is not a dirty word in the nonprofit arena. Nonprofits can make profits. They just have to invest the profits back into the mission for the inurement of the public, as opposed to for-profit companies where profits go to the owners or stockholders. In order to have resources to pour back into your mission, you must make a profit. Where else are is the money going to come from? It’s okay, folks, to be growing and doing well. Making profits is how you get there. In fact, donors are more likely to support a healthy, growing organization than they are to throw money into a “sinking ship.” So, get rid of that “tin cup” mentality.
Profit margin is highly related to return it investment. And, like return on investment, it is good for making comparisons and resource allocation decisions.
And, just like return on investment, profit margin is highly related to cost to raise $1. Profit margin, like cost to raise $1, is a good, objective, data-driven tool to use when you want to set attainable revenue expectations.
Data Collection, Recordkeeping, and Reporting
Since return on investment and profit margin are financial metrics, you will collect data from your nonprofit’s financial records, mainly budgets. It is imperative that your fundraising team is talking to your financial team. They need to coordinate formulation of the development budget and verify financial performance with each other. It also imperative that your development team checks their data with the finance team. You want to make sure that not only are your budgets that same, but your recordkeeping lines up too. You do not want to get to a board meeting and have a financial report and fundraising report with different numbers. That will only confuse board members, especially those who are less financially savvy. And when conflicting information is coming from different parts of the agency, you don’t look you have control over what is going on and your leadership is questioned. Not something you want to happen. So, take the time to get your finance and fundraising reports to tell the same story using the same numbers.
We have found there is often conflict in nonprofits between development officers and financial officers, who seem to be speaking two different languages (see The Never Ending Discussion Between Development and Accounting: Counting versus Accounting). In order to prevent this conflict, make friends with your finance officer, and learn more about his or her role. Talk about expectations on both sides. Learn about accounting and teach them about fundraising. Listen to their challenges and explain yours. Build a relationship based on understanding and mutual respect.
Bringing It Together
Return on investment tells you how efficiently you are using resources. Calculating the return on investment of your different fundraising activities can help you make resource allocation decisions. The return on investment metric is widely understood within the business community. Highlight your returns on investment when interacting with business professionals. Nonprofits can make profits, which are then used to invest in mission, grow organizational capacity, and meet more mission. Make sure the numerical data from fundraising and financial reports tell the same story.