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Fundraising costs under attack – Why charity watchdog groups are taking aim

September 17, 2013

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Most in the philanthropic community would likely agree that watchdog groups such as Charity Navigator, CharityWatch and the Wise Giving Alliance generally benefit organizations, their supporters and the people they serve. That doesn’t stop charities from regularly locking horns with watchdogs over how they evaluate and rate their subjects, though. As a couple of recent controversies illustrate, almost no issue is as contentious as the cost of fundraising.

Joint allocation divide

Last fall, Charity Navigator announced it was changing the formula it used to rate not-for-profits. Specifically, the watchdog group would no longer regard “joint allocation costs” as anything other than fundraising expenses. Traditionally, many not-for-profits have characterized a portion of some fundraising costs as program or education expenses. For example, a charity might allocate 70% of the cost of a direct mail appeal to fundraising and the other 30% to programs.

When used by professionals familiar with an organization’s finances and accounting rules, joint allocation is generally an acceptable practice. Charity Navigator, however, believes that, by tucking a percentage of fundraising expenses under the programs or education umbrella, not-for-profits are hiding high overhead — and possibly questionable financial stewardship. That said, the watchdog expects its new policy to affect the ratings of only a small percentage of the charities it evaluates.

Nevertheless, some not-for-profits and members of the direct-marketing community have cried foul. Charity Navigator’s critics claim that the watchdog is usurping the role of the independent auditor — that it doesn’t have the expertise to assess joint allocation decisions, let alone restate an organization’s audited financials.

F for fundraising

The fundraising debate goes beyond just joint allocation costs. CharityWatch issued “F” grades to two start-ups — the Disabled Veterans National Foundation (DVNF) and SPCA International (an animal welfare charity) — because 90% of the funds they raised were spent on direct-mail campaigns. Both groups were deeply in debt to a direct-marketing company.

But in his expert opinion on the two charities’ fundraising costs, economics professor and philanthropy specialist Richard Steinberg generally supported their decisions. Steinberg has argued that early-stage not-for-profits shouldn’t be measured by the same standards as established charities. Start-ups need to spend more to attract attention and build a donor base, similar to how young for-profit companies invest in future growth. His assertions, however, have been greeted with skepticism by many in the not-for-profit world.

The big question

All of this begs the question: How much is too much to spend on fundraising? It depends, of course, on the organization — its mission, life-stage and funding sources, among other factors.

In his book Fund Raising: Evaluating and Managing the Fund Development Process, James Greenfield reports that the average cost to raise a charitable dollar is 20 cents. But such benchmarks probably are of little value to most not-for-profits. They fail to consider that it’s costlier to raise funds for some missions (such as human services) and in certain markets (such as lower-income communities), or that the fundraising costs of an organization vary from year to year.

A more effective way to gauge what’s reasonable is to compare your charity to similar not-for-profits over a three-year or longer period. So, for example, if your homeless advocacy group spends 40% of its budget on fundraising, while your peers average closer to 25%, you may want to investigate the discrepancy. In such cases, ask your financial advisor to review your budget and expenditures and suggest more efficient ways to gain support.

Put in perspective

It’s smart to keep an eye on fundraising costs, but don’t spend too much time worrying about the algorithms watchdog groups use to rate charities.

Remember, donors are likely to give based on information they receive directly from your organization. So prioritize transparency by providing Form 990 and audited financial statements to anyone who asks for them. And take every opportunity to clearly communicate your mission, ethical standards and record of fiscal responsibility.

How much for the gala?

As every charitable event chairperson knows, you’ve got to spend money to raise money — and lavish dinners, open bars and live bands cost plenty. In 2011, Crain’s Chicago Business looked at what local charities were spending on their annual galas as a percentage of funds raised.

Focusing on 16 events with net proceeds around $1 million, the newspaper found that most came in under 30% — a few, far under. The Chicago Shakespeare Theater’s gala, which boasted gross proceeds of $1.25 million compared with expenses of $194,000, spent only 15.5% on fundraising.

But as several not-for-profit leaders and philanthropists were careful to caution Crain’s, such numbers don’t tell the whole story. Even galas costing more than 30% of funds raised might be considered successful if they boost a charity’s public profile or attract new supporters.

For more information on this topic, please contact Ann Knerr at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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