As charities ramp up their fundraising appeals, donors have many options for their end-of-year giving. It’s easy to see why metrics like the fundraising ratio become a go-to aid for donors when deciding who receives their support. However, it’s crucial to note that while the fundraising ratio can be helpful, it’s just one aspect of a charity’s broader assessment.
Understanding the Fundraising Ratio
The fundraising ratio is calculated as the total expenses allocated to fundraising expenses (line 5020 in the T3010) divided by the sum of the total receipted donations (line 4500) and fundraising revenue not reported in line 4500 (line 4630). The ratio answers the question, “What percentage of the donations and fundraising revenue were used to cover the cost of fundraising?” CRA considers a ratio under 35% acceptable, and over 70% will certainly draw scrutiny from the CRA.
Another ratio some people also consider is management and administrative expenses (line 5010). Some donors think of this as the “overhead ratio” when they are interested in what percentage is spent on charitable activities (line 5000).
This financial information is made publicly available for all registered charities by the Canada Revenue Agency (CRA) in the charity’s T3010 information.
Why Donors Should Consider More
There is much more to define the charity’s success than a single ratio. Charities can help donors understand what they should consider when evaluating the charity. Here are five limits of the fundraising ratio and suggestions that may help broaden your donor’s perspectives when planning to give to your ministry.
1. Reflects a Single Year of Activity
The fundraising ratio is based on one year’s financial results. To gain a deeper understanding of a charity’s performance, it’s essential to consider its historical context. Did the charity invest more in fundraising to fuel future growth, or did it incur additional management and administration expenses during a restructuring phase? Remember that the current ratios may not represent the charity’s typical financial situation.
Consider providing a change in the ratio over time or a multi-year average alongside information about the activities/projects that have been funded over the years.
2. Doesn’t Confirm Meaningful Impact
A low expenditure on fundraising doesn’t automatically indicate a charity’s meaningful impact. An organization allocating 100% of its budget to charitable activities could still be ineffective in achieving its mission. Evaluating impact is complex, and no one-size-fits-all metric can confirm a charity’s effectiveness.
Consider re-evaluating how you communicate to donors about the work and impact of your charity. Do your donors focus on expenses because much of the annual report emphasizes it?
3. Lacks Important Mission Context
A uniform ratio does not account for the diverse contexts in which charities operate. Factors such as the charity’s activities, geographic reach, funding sources, safety and security needs, volunteer workforce, and innovation efforts all play a significant role. Context is crucial when interpreting financial data.
Consider providing helpful context in your communications and demonstrating the alignment of your projects and programs to your long-term vision and mission.
4. Reduces Clarity on Financial Management
Spending more on fundraising or management and administration expenses does not necessarily imply poor financial management. In some cases, it can indicate prudent financial practices. Conversely, underinvestment in these areas might lead to poor financial management and concerns regarding sustainability. The intentionality and significance of these emphases internally may not be as clear to the donor.
Consider sharing more about the ‘why’ behind resource allocation decisions.
5. Focusing Too Much Can Lead to Undesirable Behaviour
Placing excessive emphasis on a single metric like the fundraising ratio may inadvertently result in added pressure on the charity to reduce costs to the maximum extent possible, which is not always in the charity’s (or donor’s) best long-term interest. We can start viewing fundraising, expenses, such as management and administration, as bad expenses to avoid. While this ratio is trending today, another metric may be in the future. Charities that effectively communicate a comprehensive view of their impact will stand out to donors.
Consider equipping to share about impact using other metrics and indicators of performance.
While fundraising and other ratios can be valuable tools, they should not be viewed in isolation. Consider including other essential factors when sharing about your charity with donors. To further aid your donors in their decision-making process, read the recent blog post, “7 Tips for Choosing a Charity to Donate To”.