The Cost Ratio Myth

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The Cost Ratio Myth
Allan Burrows, September 2013

News article, blogs and water cooler gossip cite many charities as “the worst” since they spend exorbitant amounts of money in raising money.

The recent “America’s Worst Charities” top 50 list, produced by the Tampa Bay Times and the California-based Center for Investigative Reporting, reveal many national organizations whose paid solicitors took as much as an appalling 90% of what they raised while the charity received little and its cause even less. No wonder many donors are wary.

Let’s agree that, as in any sector, there are egregious examples of exploitation and excessiveness; taken at face value, I cannot argue with the facts cited on the list. Let’s also agree, however, that in reality, the vast majority of nonprofits follow a more normal guideline and adhere to a higher standard of cost ratios when it comes to fundraising. But what is the right formula? It depends.

So much depends on how the organization raises money, the age of the organization, the community it serves, and so on.  A best practice for nonprofits is not to look at fundraising as a cost, but rather that fundraising is looked upon as an investment. That investment can be measured by the return on the investment’s impact on the mission.  Advice I once heard used by colleagues is still relevant today for nonprofit boards and staff:

Focus not on cost minimization, and instead focus on cost optimization. 

Boards of nonprofits today should be unapologetic if they can justify reasonable costs associated with fundraising under the banner of cost optimization.  “Reasonable” ultimately has to be defined by the board and they should be transparent in their justifications.  Still, boards often mistake fundraising as a cost, not as an investment, thus the minimization. For example, when nonprofits launch austerity measures, fundraising costs are the first to go. Then, as if completely taken aback, board members wonder why the organization suffers from even greater lack of funds.

AFP has general best practices regarding cost ratios for fundraising and can serve as a general guide. Donors can use websites like Guidestar or Charity Navigator to investigate nonprofits and their associated income and expenses. Charity websites which post annual reports can emphasize organization optimization.

Most donors are moved to give, inspired by the organizations they choose to support, and simply want to know that mission is being served and that the board is monitoring and accounting for the organization and spending money “within reason” to further the mission. Isn’t that why we give?

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