February 29, 2016
Managing the Risks and Exposure Associated with Fundraising Activities
By Robert Miller, Partner, Advisory Services
For many nonprofit organizations, a robust fundraising function is an important part of any long-term plan for success. A nonprofit's executive leadership team must, however, recognize that there are some significant risks that come with fundraising, and those risks and any related exposure for the organization must be properly managed. Many nonprofit leaders who fail to recognize and consider the type of exposure that can come with fundraising activities have seen their organizations pay the price for mistakes that could have been avoided with proper planning and strategy. Whether funds are obtained from government grants or received from private donors, nonprofit organizations and their management teams should always maintain an awareness of the need to actively manage and monitor the fundraising function.
So what are the key things to consider when it comes to fundraising?
For starters, many donors and other interested parties, unfortunately rely heavily on a ratio of total fundraising expenses to overall expenditures (or expenditures on programs) as a way of gauging the nonprofit's effectiveness and ability to focus on its core mission. Executives should ensure that fundraising expenses, relative to program expenses and as a fraction of total expenses, are reasonable. Although the expectation varies by the nature of organization and services provided, for some nonprofits, fundraising expenditures in excess of 25 percent of total expenditures may be viewed as excessive.
Executive leadership should carefully evaluate the procedures and controls that are in place to process and track restricted contributions and any other requirements from donors. Many donor-imposed restrictions also come with certain reporting requirements, and there must be an effective process for ensuring that any such requirements or other requests are carefully followed and met by someone who is officially designated to be responsible and accountable.
There will occasionally be instances where donor restrictions on contributed funds or other special requests or requirements cannot be fulfilled. A well-managed nonprofit should ensure that there is a mechanism in place to communicate any challenges and difficulties in fulfilling requirements to donors openly and in a timely manner. Lines of communication with key donors should be regularly maintained.
One often overlooked area of fundraising is marketing and solicitation letters. These should be carefully reviewed to ensure that they are not misleading in any way. Solicitation letters should be unambiguous about how donations will be used. Written materials should also contain contact information that will enable potential donors to get clarification regarding any questions that they may have, both before and after a donation is made.
Nonprofits face exposure even after a securing a contribution. A lot can go wrong after receiving a pledge or donation of cash or property, whether due to misunderstandings, poor communication or inadequate management. Donors generally do not want to be surprised about the fact that their contributions were used in a manner that was inconsistent with their expectations. This can cut off future funding from that donor and in some cases generate negative publicity for the nonprofit. Carefully consider and monitor all conditions attached to any donation received.
Similarly, some donors can react quite negatively to what they view as excessive fundraising costs (for example, a major donor learning that, after fundraising expenses, only about half of every dollar donated makes it towards supporting the nonprofit's programs and mission). Nonprofits, especially when conducting fundraising drives or special campaigns, are well advised to be transparent and to disclose, up front, the actual costs associated with fundraising efforts.
Nonprofits should be wary of donors who contribute primarily to satisfy a private agenda and not necessarily to further the nonprofit and its overall mission. Gifts that have significant long-term restrictions can end up costing the nonprofit more than the benefit received from the gift. An example of this might be a donation of real estate and or other property that comes with long-term restrictions on the sale of such property. Maintenance costs for large equipment, real estate taxes and environmental costs associated with certain assets may be excessive, and without the ability to sell the asset in order to plan for or adapt to a changing business environment, such assets can create a drain on the organization's resources.
While individual fund drives and campaigns may have a limited duration, fundraising as an overall function is inherently long-term in nature, and as such, should also be viewed as part of a long-term strategy. Expenses in general tend to increase over time, and fundraising projections should increase in tandem as part of the long-term plan. Without growth in funds raised, many nonprofits will be forced to trim expenses, which can quickly spiral into reduced programs and services to the communities or causes served.
Nonprofits face many challenges in managing their organizations. Fundraising will always be one of the key areas to consider. Executive leadership teams should think carefully about the above considerations and always manage their fundraising function to limit exposure and to stay within the context of the organization's overall mission and purpose.