What Is a Good Fundraising Efficiency Ratio?

The fundraising efficiency ratio is a financial metric used by nonprofit organizations to assess how effectively they convert fundraising expenses into donations. This ratio provides insight into the financial health and operational effectiveness of a nonprofit’s fundraising efforts. It is a key indicator that can help guide strategic decisions about resource allocation within the organization.

Understanding the Fundraising Efficiency Ratio

The fundraising efficiency ratio measures how much a nonprofit spends to raise each dollar. It reflects the cost-effectiveness of an organization’s fundraising activities. This ratio is composed of two primary elements: total fundraising costs and total contributions.

Total fundraising costs include all expenses directly associated with soliciting and securing donations. These can encompass a wide array of expenditures, such as salaries and benefits for fundraising staff, marketing and advertising costs for campaigns, expenses related to special fundraising events like venue rental or catering, and technology costs for online fundraising platforms or donor management software.

Total contributions refer to the entire sum of money and in-kind donations received by the organization during a specific period. This includes all forms of donations, whether from individuals, foundations, or government agencies. These contributions represent the gross revenue generated directly from the fundraising efforts.

Calculating the Fundraising Efficiency Ratio

Calculating the fundraising efficiency ratio involves a straightforward formula that divides total fundraising expenses by total contributions. The formula is: Fundraising Efficiency Ratio = Total Fundraising Expenses ÷ Total Contributions. This calculation typically uses data from a specific period, such as a fiscal year.

For example, if a nonprofit organization spent $20,000 on fundraising expenses and received $100,000 in donations during the same period, the calculation would be $20,000 ÷ $100,000 = 0.20. This result means the organization spent $0.20 to raise each dollar. Financial information needed for this calculation can often be found in a nonprofit’s financial statements or their IRS Form 990 tax return.

Interpreting the Ratio’s Meaning

The fundraising efficiency ratio reveals how many cents an organization spends to raise each dollar. A lower ratio generally indicates greater efficiency, meaning more of the raised funds are available for the organization’s programs and mission.

Many charity evaluators and industry benchmarks consider a ratio of 0.20 or less to be strong. Some top-tier nonprofits aim for even greater efficiency, spending less than $0.10 per dollar raised. Donors often prefer organizations with lower fundraising costs, as it suggests their contributions are being used effectively to support the cause. Organizations like Charity Navigator give higher ratings to those spending less than $0.20 for every dollar raised.

Contextualizing the Ratio for Effective Evaluation

While the fundraising efficiency ratio is a useful metric, it should not be the only factor considered when evaluating a nonprofit organization. Various legitimate factors can influence this ratio, making direct comparisons between different organizations potentially misleading.

The age and stage of an organization can affect its ratio; newer nonprofits often have higher initial fundraising costs as they invest in building a donor base and establishing systems. The type of fundraising activities employed also plays a role, as methods like direct mail campaigns or large events can have higher costs compared to online fundraising or cultivating major gifts. Additionally, the specific mission or cause of an organization can influence fundraising expenses; some causes may require more extensive public awareness campaigns or advocacy efforts, which can be costly. The size of the organization matters as well, with smaller organizations sometimes exhibiting higher ratios due to fixed costs that are spread across a smaller revenue base, whereas larger organizations may benefit from economies of scale.