Yesterday, I argued that the three things that matter in your budget are net revenue, file/program health, and cross channel/multichannel/omnichannel health (how much are you contributing to other fundraising and non-fundraising efforts.
That ignores some key traditional metrics. And that’s intentional. Here’s why:
Costs. Many nonprofits look to minimize their overall costs (and believe you me, I have seen some nonprofits transcend lean and mean and become emaciated and ticked off). But this is a fallacy in direct marketing.
Let’s picture direct marketing once again as if it were a magic box that you put costs into and got revenue out of.
If an additional $100 in the magic box brings you an additional $150 in revenue today, you should do that. That’s covered by net revenue.
If an additional $100 in the magic box brings you an extra $200 next year, you should do that (unless you are in a hyperinflationary market). That’s covered by program health.
If an additional $100 in the magic box brings you an additional .5% chance of a $100,000+ bequest (crosschannel health), you should do that. That’s covered by crosschannel health.
The problem with overall cost as something you look to minimize is that it could ignore these three investment opportunities. Don’t do that.
Gross revenue. If the impacts on file and crosschannel health were the same, would you rather spend $2 million to make $4 million or $3 million to make $5 million? Clearly the former, as you can getting more return on your investment.
Yet some nonprofits have a goal of “we will increase our revenues to X” instead of “we will increase our revenues to Y, net of direct marketing costs.” The former gives an incentive to overspend at the expense of net revenue, program health, and crosschannel health.
This is yet another reason why Charity Navigator’s financial rates are so very, very flawed and actively counterproductive. They have cost of fundraising in their model so that a 10% drop in ROI could cost you 2.5 points (out of 100 (actually 70 because they spot you 30 points)).
However, if that turns your organization into one that is growing substantially in income and program expenses as a result, instead of shrinking, you get an additionally 20 points (because revenue growth and program expense growth are two 10 points categories. This is why Charity Navigator rated an active cancer charity scam three stars – because it was growing. If you doubt me, here’s their rating from the handy dandy Internet archive.
Conversely, a charity that has encountered tough times will get zero points out of ten on both of these growth indicators, giving them two stars on financials or less, hurting that struggling charity in its efforts to work its way out of the hole. I will at some point dedicate a week to the perverse incentives of Charity Navigator, which sets itself up as a watchdog but instead chews up your shoes and poops on your carpet.
Return on investment is important. But it should be strived for, not budgeted for. Later this week, you’ll see why, as we look to get to our optimal program.
So tomorrow, I’ll talk about the nuts and bolts of budgeting and some pitfalls to watch out for.