How to think about your fundraising investment -Philanthropy Daily

Last week I suggested that nonprofits would do well to see development as a profit center rather than a cost center. Fundraising “expenses” are better seen as investments insofar as increasing your investment in fundraising will increase your revenue—and that means increasing your organization’s impact.

In other words, you limit your development investment at your own peril—or, more precisely, to the detriment of whomever you might impact were you able to do more by raising more.

LEAD WITH GOALS

So here’s a better way of asking the same question that we did before: “How much should I invest in fundraising?” Now we’re on to something! Yes, we are talking about spending money and increasing costs, but it’s for the sake of a greater return.

Once we understand that, we can approach the question well. That’s important because it is in fact a valuable question. Spending the right amount of money on fundraising is important—but just as important is not being afraid of spending money on fundraising.

Last January, James Davenport wrote an insightful article criticizing Charity Navigator’s rubric for rating nonprofits based on their development expenses. Charity Navigator (and similar transparency sources) aren’t all bad, but they approach this question all wrong. They look at organizations at a point in time, and fail to take into account growth goals. As James described, Charity Navigator docks points as your fundraising “expenses” increase. But that formula fails to consider whether increased costs are beneficial, even strategic.

And that is the main point: the degree of your development investment should be scaled to your growth goals. “How much is too much?” is a real question in this context, and the answer is not (as Charity Navigator would say) “Shoot for as little as possible!” But reckless development spending is also not advisable.

HOW MUCH IS TOO MUCH

The answer to how much should an organization invest in fundraising is its overall growth goals. It costs more to grow than to stay (relatively) the same size. And so if your plans are to grow—that is, expanding your mission impact—then you need to increase your fundraising investment. If your plans are to stay relatively the same size, accounting for basic annual market growth, then your fundraising investment should be much lower.

In other words, the answer to the question “How much should I invest in fundraising?” is another question: “What phase of growth am I in?” Startup nonprofits or nonprofits entering large capital campaigns often need to spend vastly more on fundraising expenses than they have in the past. That can look really bad on a Charity Navigator rubric. (But it will probably look really good from the perspective of whomever your organization serves!)

The chart below offers one general way to think about your fundraising investment. The determinative factor is “distance from goal.” Notice: the first thing you need is a three-year revenue goal, and then you can scale your investment accordingly. The further you are from your goal—the more aggressive your growth plans—the greater your fundraising investment will be.

Let’s look at an example in the chart below. This organization has a goal to raise $1 million in annual contributions in 2025. Here in 2022, they are raising $400,000. They are, then, more than 50% of the way away from their goal.

This year, they’ll have a very significant fundraising budget—up to 33% even! They are investing in staff, systems, tools, and so on. Laying the groundwork and planning for long-term success is not easy . . . or cheap! But each year, as they get closer to their goal, the percentage of their revenue spent on fundraising goes down. Notice that the dollar amount may or may not change (it’s a range), but as a percentage of the overall budget, it’s going down over time.

What’s important in this example is not the specific dollars, but the trajectory. Significant fundraising expenses are not only unproblematic; they are responsible if your goals are to grow and to ensure that that growth is sustainable. The goal for the organization above isn’t just to hit $1 million and slink back down to the mid-six-figure range in annual revenue. It is to hit $1 million and stay there—or continue growing!

DYNAMIC INVESTMENTS

While it is completely fine to spend 33% of your budget on fundraising for a period of time, it is not wise to maintain that level of reinvestment for the long-haul. Organizations can and should vary their fundraising expense as a percentage of their budget. As your nonprofit grows, you should realize economies of scale in both your programs and fundraising expenses. Startup costs and various system implementations will expand your investment in the early days of growth, but a lot of that should go away over time.

The important thing to note is that an investment in your profit center may be the single largest way you can increase your organization’s influence and improve or advance the impact your group has on those it serves.

This article is part two of a two-part series. You can read part one here.