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Which Pile of Money Would You Rather Have?

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Dan Pallotta couldn’t have been more right with his TED talk ‘The Way We Think About Charity is Dead Wrong.’

But he wasn’t just trying to explain the importance and good that ‘overhead’ does for charities to the public and media.

It’s also the charity staff who really need to stick up for themselves and not be ashamed about their non-program costs. We shouldn’t excuse, apologise for, or try to be creative with our numbers.

If a charity claims that 90 percent (or occasionally 100 percent!) of my donation will go straight to ’programs I can think of only four scenarios:

  1. They are a group of volunteers with no staff costs, no accounting or legal costs, no building, no compliance costs and no training costs. This could be a group of wonderful people donating their time and successfully be talking others into doing the same. They are almost certainly small in terms of their public fundraising income.
  2. They are stretching the truth. Perhaps a donor is donating the costs of administration and fundraising. Technically, this should be reported as income and the costs are still costs.
  3. They have a big endowment or fund that covers the cost of administration and fundraising. Same thing as if a donor is covering the cost, there should be income and expenditure reported for this.
  4. They have no desire for growth, and don’t want to raise more money– maybe they don’t need more. Nearly all organisations can grow their income by spending more on fundraising.

In fact, when you look at growth in net income – that is, the money you can spend on your programs – the number one indicator of growth is always the amount spent on fundraising.

Spending more on fundraising is often a good thing!

Efficiency is important. Waste is always bad. But net income – the amount to spend on beneficiaries – is the most important outcome.

Here is a simple example.

If you were a charity fundraising in South Africa, which of the two piles would you prefer to spend on your beneficiaries?

RandRand e1526372218307
The left-hand pile has 3,000 Rand, the right-hand pile has 150 Rand.

Easy isn’t it?

The left pile will help more people.

But what about when you realise that the left pile was the ‘profit’ of a fundraising activity that raised R5,000, and the right pile raised R150?

That means the left pile comes with a cost of fundraising of 40 percent (since the event raised R5,000 and R3,000 went to projects, the cost must have been R2,000, and R2,000 divided by R5,000 = 40 percent).

The right-hand pile has a cost of R0. So therefore zero percent cost of fundraising.

In this case, the pile on the left after a cost of fundraising of 40 percent will do more good than the pile on the right after a zero percent cost of fundraising.

So where is the limit?  For example, 80 percent costs from £10,000,000 (£2,000,000) leaves more to spend on your cause (£2,000,000) than if costs were more than 30 percent of £1,000,000 (leaving me £700,000). But the first ‘pile’ can do nearly three times more ‘good’.

If I had a business turning over £10,000,000 with a 20 percent profit margin, it would be a more valuable, likely more secure and generally a ‘better’ financial model than a business turning over £1,000,000 with a 70 percent margin!

Dan talks a lot about why it is unfair that we in the charity sector have to behave differently to businesses, and whilst it ‘feels’ wrong to generate huge amounts of revenue at a high cost, surely the point is always ‘what is the net good?’

I don’t like the idea of 80 percent fundraising costs either. We should never waste money, or undertake ineffective fundraising activities. But a high cost of fundraising can be perfectly justifiable, particularly during a charity growth phase or an event where only a part of the cost of the event is actually expected to go to charity.

The problem with explaining the cost of fundraising is not usually donors or even the media, but often internal perceptions of what donors may think.

One charity I know grew from $500,000 income to $8,000,000 per annum in about six years. In the first year of a strategic fundraising growth plan they had about $400,000 to spend on their cause. By the sixth year of that growth strategy, they had about $5,000,000. Their cost of fundraising went from 20 percent to 37 percent. Fine by me.

However, in the second and third year of their growth plan, their cost of fundraising was around 80 percent. This was because of the cost of acquiring new donors. And it is those people now contributing to their annual income of $8,000,000.

That charity even got hammered in the press for a short time. Despite fears internally, donors were not put off by the media and continued to give, and the charity grew significantly. By being brave and sticking to their plan they transformed their entire organisation and had a much, much greater impact on their beneficiaries.

Ask most donors if the cost of fundraising is important, they say yes. Ask the same people what the cost of fundraising of the charity they donate most to is, they generally don’t know. They think and believe it is important – but in the end, they are just lovely people who want to help a cause they care about.

Please, don’t let an obsession with the cost of fundraising hold you back from helping more people, animals or the environment.

What is your biggest challenge with the cost of fundraising within your organisation? Please share in the comments, I’d love to hear your experience.

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