If there’s one thing that concerns both the corporate and nonprofit sector equally, it’s the constant fight to minimize costs while maximizing returns. But where for-profits can operate relatively unhindered and calculate elaborate cost-saving schemes, some nonprofits can’t even afford the expense of hiring an accountant.

That’s why it’s critical for nonprofits to understand what hidden costs might accompany fundraising campaigns, and why it’s best they discover them before they go over budget and risk losing the confidence of their boards and donors.

Look at the basics

Ken Wyman, CFRE and director of Ken Wyman and Associates in Toronto, suggests that nonprofits would do well to truly understand where their expenditures lie and leave no stone unturned. “The hidden costs of fundraising can make the difference between a successful campaign and a disaster,” he says.

According to Wyman, some of the biggest costs come from a misunderstanding of how to effectively budget labour costs. “Too often we do not count the direct cost of fundraising staff time, much less the indirect cost of receptionists, supervisors, bookkeepers and other overhead costs,” he says. For Wyman, one of the most overlooked and often under-reported costs involves misuse of staff, whether deliberate or not.

“Most thoroughly hidden [is] the cost when non-fundraising staff are dragged into a campaign to work on an event or stuff envelopes,” he says. “Arguably, if non-fundraising staff wages are covered by earmarked grants, using their time for other purposes is misappropriation of funds.”

Wyman adds that a charity should not shirk from reporting subsidies on fundraising activities. “If a charity gets a sponsor to donate the wine for a gala, or production of an ad campaign, or even discounts on printing, it should record the full costs as an expense, and the subsidy as income,” he says. If not, the nonprofit risks being unable to explain fluctuations in spending to their boards if they don’t get equal subsidies in future campaigns.

Chameleon-like costs

Cynthia Armour, CFRE with Elderstone Resource Development, cautions that costs mean different things to different organizations. “There’s a bunch of factors that need to be considered,” she says. “The age of the organization, the location of the organization, how well-connected it is. Is it a tried-and-true brand or an avant-garde thing that people can live without? That’s why it’s difficult to have agreement on expenditures.”

According to Armour, the main thrust of a nonprofit’s costs should take into consideration one basic tenet: that it’s much less expensive to renew a donor’s support than to acquire a new one. She argues that younger, more naïve charities may think that there is one tried-and-true method to fundraising and calculating costs, but she advises otherwise.

“Organizations brand new to fundraising [may] have a tradition of holding ‘special events’, because they think of this as their default for fundraising,” she says. “If an organization doesn’t have a strong infrastructure for volunteer support, then where are they getting their help from? If it’s not volunteers, then there’s a cost.”

Similarly, Armour states that if organizations look to consultants for planning help, they may forget to count the consulting fees in their costs. Beyond that, other fundraising methods like mail-out campaigns also come with hidden costs. “If the organization isn’t very sophisticated in its fundraising savvy, they may just be counting the postage of mail-out, design-work and such,” says Armour. “But they may not count the cost of the ‘thank-you’ letters, the receipts that have to go out afterwards, or the newsletters that a donor gets because [they’re] trying to promote the stewardship of that donor.”

Playing the money game

Taking a somewhat contrarian view of nonprofit cost counting is Steve Thomas, chair and creative director of the Stephen Thomas fundraising company in Toronto. In business 26 years, Thomas is of the opinion that you have to spend money to make money.

“I don’t believe in this cost thing. And I don’t believe in it very strongly,” states Thomas. “Each charity has a mandate to carry out its mission, and almost always, the more money that they have, the better they can carry out that mission. So measuring charities by their expense is counterproductive and, I believe, goes against the mission of the charity. In other words, if you spend twenty cents to make a dollar, if you can spend thirty cents and make more money, you should do it.”

That said, Thomas believes that charities are obliged to “play all sorts of stupid games” in what expenditures they can and can’t report. But he is adamant that if charity boards of directors would be more flexible in their costs strategies, they could raise more money for their organizations.

“You can spend five cents to raise a dollar and look fantastic [on paper], but you hardly raised anything,” he says. ” It’s a money game.”

Striving for a consensus

Ray Marshall is a CFRE and 1st vice president of the Vancouver chapter of the Association of Fundraising Professionals (AFP) and is well aware of how difficult it is for charities to figure out what costs should be.*

“AFP is grappling with this question, as is our entire industry,” he says. Marshall notes that AFP does not yet have a definitive guide to fundraising costs, but it’s gathering information on the subject, which has been a significant part of recent leadership discussions.

However, in his capacity as a fund development professional outside of his role with the AFP, he explains that no single formula or “set percentage of ‘costs to funds raised’ can be set definitively.” Marshall points out that boards and donors are calling for increased accountability and transparency in fundraising, but he believes this dialogue will continue because there are just too many variables to account for across types of organizations.

Like Wyman and Armour, Marshall has seen his share of nonprofits forget about hidden costs. “Often the ‘soft costs’ such as communications materials, administrative costs and overhead expenses are not factored into the total costs of funds development,” he says. To avoid this, he counsels his clients to always create an initial budget for “discipline and realism to fundraising.”

Keep track of costs, at all costs

It’s necessary for nonprofits to be very exacting when they calculate expenditures. Failure to do so can ultimately result in lost revenue, lost time, and most importantly, loss of public awareness. The perception of a charity’s value in the public eye can decline if cost overruns force an organization to spend less, thus lowering their profile.

“Fundraising can increase or deplete a nonprofit’s brand value,” says Wyman. “While this is harder to evaluate in monetary terms, it is real.” Marshall concurs.

“More and more, we are hearing from leading philanthropists that they want to support campaigns where it can be proven that there is a strategic plan that documents ‘best campaign practices’ which will guide an effort to success,” he says. “The running of a campaign is, in part, a reflection of the organization’s management capability, ethos and stewardship.”

Charitable organizations would be wise to heed these words and be aware of the above-mentioned hidden costs, as it could mean the difference between success and failure.

Editor’s Note: The Canada Revenue Agency (CRA) requires registered charities to spend at least 80% of the amounts for which it issued official donation receipts in its immediately preceding year on charitable activities. Therefore, the CRA’s rule of thumb is that administrative expenses in a given year – including fundraising expenses – should be no more than 20% of the amount for which donation receipts were issued. For more information, visit:
www.cra-arc.gc.ca/E/pub/tg/rc4108/rc4108eq.html#P401_39217.]

Andy Levy-Ajzenkopf is president of WordLaunch professional writing services in Toronto. He can be reached at andy@wordlaunch.com.