- posted by Frank A. Monti, CPA in the Mission Matters Blog
If you saw the movie Money Ball, you realize that successful baseball teams no longer select players based on how they look (“he has the look of a star”). Today they analyze thousands of statistics and know more about a player than the player himself. In the book, Money Ball, Bill James, the father of Sabermetrics, is quoted as saying “I am not shocked that we are doing this much analysis in the game of baseball. I am shocked that they do not do this kind of analysis in all other businesses.”
The analysis of the performance of not-for-profit organizations is going down that statistical road. No longer are people content to view a charity and say “they look like a good organization. They appear to be doing a great deal of good in the community.” More and more we see charity watchdog groups performing a statistical analysis of a not-for-profit’s financial statements and tax return and reporting the results to the world.
Charity Navigator, the largest independent charity evaluator, is one such organization. One of the metrics they report upon is a charity’s financial health score. One of the six components that comprise the financial health score is the charity’s fundraising. Charity Navigator is not the only organization interested in fundraising efficiency. Each year, Forbes Magazine publishes an issue devoted to charity in America and it reports on the fundraising efficiency of America’s largest charities. The magazine clearly advises its readers not to donate to organizations with a fundraising efficiency below 70%.
Fundraising efficiency is the amount a charity spends to raise $1. The less an organization spends, the better it is. The charity’s fundraising efficiency will be higher as you spend less on fundraising. Fundraising efficiency is computed by comparing fundraising expenses to contribution income. How does Charity Navigator and Forbes determine this? It’s easy. Fundraising expenses and contribution income are clearly identified on every organization’s Form 990. Every charity’s Form 990 is available on the internet at www.Guidestar.org.
Unfortunately, the Form 990 is sometimes vague as to what figures belong on what lines. If the preparer is not aware of the importance of fundraising efficiency, a caviler approach to reporting revenues may lead to a lower fundraising efficiency than is in the organization’s best interest.
This problem is frequently more acute on the organization’s annual general purpose external financial statements. Here, organizations usually like to describe their sources of revenue and will sometimes identify contribution income by other names, such as “foundation support” or “special events”. When the reader of these statements computes the fundraising efficiency, they compare fundraising expenses with contributions. So if your contributions have been reported on three or four different revenue lines, it is likely that your fundraising efficiency is going to be computed abnormally low. This is not a good thing.
Our solution to this is to either properly identify all contribution revenue as simply “contributions” or, even better, include a fundraising efficiency footnote within your financial statements. In the note, you can perform the fundraising efficiency calculation for your financial statement readers and they can see how you have calculated it, what it includes and agree with you that your organization is meeting this metric with flying colors. It is always better to give people what they are looking for rather than depending on them to find it for themselves.
As you can see, resource providers are seeking and receiving more and more statistical information about not-for-profit organizations. They are no longer making their funding decisions based on a “good feeling” for the organization. Fundraising efficiency is just one of the new metrics to measure not-for-profit effectiveness. I will discuss others in later blogs.
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