The fundraising crisis

It’s becoming more expensive for charities to raise money, and if trends continue the sector may soon find itself in crisis.

I’ve spoken previously about issues surrounding claims made by Comic Relief, and other large charities, that ‘none’ of its fundraising costs are paid for by public donation. So let’s now take a closer look at why talking about fundraising efficiency and sharing those figures can help address common challenges.

Every new pound is more expensive to raise than the previous

Fundraising is a sophisticated field, and NPC is not an expert in this area, like the Institute of Fundraising. But we’re talking about it now because we see a red flag.

We recently did a light-touch analysis of fundraising ratios for 15 large, well-known charities over the last five years. At first glance it looks only mildly bad. Most of the ratios are between 2 and 4.5, meaning that for every pound spent on fundraising, £2-4.50 is earned.

However, to get a truer picture we need to remove legacies from the voluntary income. We ought to of course consider what charities spend on raising legacies, but it’s very difficult to attach expenditure of today with income of tomorrow in this area, due to the large time lag and a variety of external factors such as changing property prices.

Without legacies, we see from our analysis that the majority of ratios are as low as 1.5-2.5 (Comic Relief at 4.8 in 2012 has one of the higher ones!). More importantly, on average, the fundraising ratios without legacies have been steadily decreasing over the last five years. In 2007-2008 a pound of fundraising made £3. In 2012-2013 the number shrank to under £2—a decrease by a third.

This doesn’t give a picture that can be understood independently, but it does provide an indication that for many charities it’s becoming harder to raise money—and so now, more than ever, it’s necessary to talk about what lies behind these figures.

Transparency is everything

Some of the organisations we looked at have a ratio of up to 9.0 without legacies, while others sit consistently under 1.5. This doesn’t necessarily tell us anything about how good the charities’ fundraisers are, and it certainly shouldn’t be a measure of how effective they are at helping their beneficiaries.

Fundraising ratios cover a variety of nuances. Spending is often bundled up with general awareness building activities or campaigning, and organisations may choose more expensive fundraising strategies because they align with their objectives (for instance, a health promoting bike ride instead of a cookie sale). Changes in the external financial climate or an investment in the future—eg,  a big campaign one year that’s expected to contribute to income in coming years—can lead to a sudden drop in ratios.

But we don’t know any of this until we start asking the right questions.

Transparency is a central theme in our recent report on financial management, Keeping account. And it applies to fundraising ratios, too. Is the charity’s management able to explain deteriorating fundraising ratios—both trends and absolute numbers? When comparing similar organisations, why are there ratio differences? And crucially, does this represent a risk to the charity?

Although fundraising is a sensitive issue, if charities want to avoid a future funding crisis, it’s essential to dare talk about failure and so learn the lessons of others.