What Is a good fundraising efficiency ratio?
Fundraising is a critical activity for many organizations, especially non-profits, as it provides the necessary resources to achieve their missions. However, not all fundraising efforts are created equal. To ensure that funds are raised efficiently and effectively, organizations often measure their fundraising efficiency ratio. This ratio helps determine how well an organization is using its resources to generate donations. In this article, we will explore what a good fundraising efficiency ratio is, why it is important, how to calculate it, and how organizations can improve their ratios.
Understanding the fundraising efficiency ratio
What is a fundraising efficiency ratio?
The fundraising efficiency ratio is a metric used to evaluate the effectiveness of an organization’s fundraising efforts. It is calculated by dividing the total amount of funds raised by the total amount spent on fundraising activities. This ratio provides insight into how much money is being spent to raise each dollar of donations. A higher ratio indicates more efficient fundraising, meaning that less money is being spent to raise each dollar.
Given that many organizations have activity revenue, this needs to be deducted from gross revenue. Many not-for-profit schools charge fees, and hospitals charge for services. Their not-for-profit activities, such as scholarships or research, which are key to their mission, are funded by specific activities or programs.
My own interest in this is rooted in my experiences as the president of a professional association that sought to provide ongoing education to its members, as the Chair of a private school board and as Chair of the finance committee of an aged care facility. Each of these was active in raising funds to undertake their core mission.
Why the efficiency ratio is essential for measuring success
The fundraising efficiency ratio is essential for several reasons. First, it helps organizations assess the effectiveness of their fundraising strategies and identify areas for improvement. Second, it provides transparency to donors and stakeholders, demonstrating that the organization is using its resources wisely. Finally, it can be used as a benchmark to compare the organization’s performance against industry standards and other similar organizations.
How to calculate the fundraising efficiency ratio
Step-by-step formula explained
Calculating the fundraising efficiency ratio is straightforward. The formula is:
Example calculations for clarity
For example, if an organization raises $100,000 and spends $20,000 on fundraising activities, the fundraising efficiency ratio would be:
This means that for every dollar spent on fundraising, the organization raises five dollars in donations.
Tools to help measure efficiency
There are various tools and software available to help organizations measure their fundraising efficiency ratio. These tools can track fundraising expenses, donations, and other relevant data, making it easier to calculate and monitor the ratio over time.
What defines a good fundraising efficiency ratio?
Industry standards and benchmarks
A good fundraising efficiency ratio can vary depending on the industry and the type of organization. Generally, a ratio of 4:1 or higher is considered good, meaning that the organization raises four dollars for every dollar spent on fundraising. However, it is important to consider industry-specific benchmarks and standards when evaluating the ratio.
Factors that shape the definition of “good”
Several factors can influence what is considered a good fundraising efficiency ratio. These include the size of the organization, the type of fundraising activities, and the target audience. For example, larger organizations may have higher fundraising expenses but also raise more funds, resulting in a different efficiency ratio compared to smaller organizations.
Variations by sector and organization type
Different sectors and types of organizations may have varying definitions of a good fundraising efficiency ratio. For example, educational institutions may have different benchmarks compared to healthcare organizations or environmental groups. It is important for each organization to understand the specific context and standards relevant to their sector.
Limitations of the fundraising efficiency ratio
Why it’s not the only metric that matters
While the fundraising efficiency ratio is a valuable metric, it is not the only one that matters. Organizations should also consider other performance indicators, such as donor retention rates, the impact of fundraising campaigns, and overall financial health. Relying solely on the efficiency ratio can provide an incomplete picture of an organization’s fundraising effectiveness.
Balancing efficiency with other performance indicators
To get a comprehensive understanding of fundraising success, organizations should balance the efficiency ratio with other metrics. This holistic approach ensures that they are not only raising funds efficiently but also achieving their broader goals and mission.
How to improve your fundraising efficiency ratio
Optimize costs in your fundraising efforts
One way to improve the fundraising efficiency ratio is to optimize costs. This can be achieved by negotiating better rates with vendors, reducing overhead expenses, and leveraging volunteer support. By minimizing costs, organizations can increase the amount of funds raised relative to expenses.
Focus on high-yield campaign strategies
Organizations should focus on high-yield campaign strategies that generate significant returns on investment. This may include major gift campaigns, corporate sponsorships, and online fundraising initiatives. By prioritizing strategies that yield higher donations, organizations can improve their efficiency ratio.
Adopt technology to streamline operations
Adopting technology can help streamline fundraising operations and reduce costs. For example, using donor management software can automate administrative tasks, track donations, and provide valuable insights into donor behavior. This can lead to more efficient fundraising efforts and a better efficiency ratio.
Track and analyze campaign performance for continuous improvement
Regularly tracking and analyzing campaign performance is crucial for continuous improvement. Organizations should monitor key metrics, evaluate the success of different fundraising strategies, and make data-driven decisions to enhance their efficiency ratio over time.
By Paul Raftery, CEO, Projects RH
