Chapter 9
Fundraising
The area of fundraising offers perhaps the most significant difference between nonprofits and NGOs and commercial organizations and some of the biggest risks for organizations. It’s been said that seeking funds, cultivating new donors, holding benefits and events, writing grant proposals, entering competitions, securing goods to raffle off or auction, soliciting donations through direct mail, on-line and through other portals and crafting personalized thank yous, among other fundraising and development activities consumes up to 80% of a nonprofit executive’s time.
Some nonprofit organizations are fortunate to have dedicated sources of private funding. They can budget and use a portion of these assets to underwrite all or some operating or program expenses with funds that come from an endowment, investment portfolio, or bequest. Other organizations generate fundraising income from fee-based events or product sales, foundation grants, individual donor appeals and major gift campaigns, capital campaigns, direct mail and online appeals, and other activities that produce general operating support or project-restricted resources for program and operating expenses. Regardless of source, today nonprofit leaders and boards view their fundraising roles as primary. Even when a nonprofit organization has a steady source of private income or a guaranteed revenue stream set up in perpetuity, circumstances arise and things change calling into question just what guarantees and perpetuity really means. As an old saying goes, “Perpetuity is just around the corner.”
Note: Chapter 8 on finance addresses financial issues and risk regardless of whether revenue comes from private or public sources. You may want to read that alongside this chapter.
Adding to the complexity, nonprofit fundraising isn’t just about money. Many nonprofit organizations solicit and receive in-kind donations that are not cash. These may have monetary value but they come to the organization as a non-cash item. Two of the most common of these is the volunteer service of board members and pro bono experts and the receipt of donated goods to be used by the organization or sold to raise money for operations. (Chapter 6, “Personnel and Volunteers” has more information on this topic.) In-kind donations can be of any type that the organization accepts. Some organizations have the capacity to deploy volunteers and make use of pro bono assistance. Others can accept real estate and art or clothing and furniture donations to convert to cash for operations or distribute to program participants. Bequests can contain cash, securities and non-cash items, but donations of new or used items can be common.
Fundraising is an area that lays risk traps that trip up many nonprofits. Managing the flow of volunteers, maintaining inventory, storing and distributing goods intended for clients, handling cash donations, tracking grants requires an organization to have dedicated personnel and formalized policies and business processes for each source of private funding. Fundraising is also among the most heavily regulated of all nonprofit activities. Despite this, stories appear regularly about fraud, malfeasance or fundraising blunders that cost nonprofits their reputations, donors and community confidence.
Fundraising for nonprofits typically involves five activities each of which brings with it its own set of risks. The activities and risks are discussed in this chapter. The activities are:
–Working with grants and foundation funders. The processes of getting grants, working with funders, and managing grants—once you have gotten them—can be fraught with risk. Here are some of the issues to watch for.
–Managing donors. The donor base (that is, the individuals who donate to your organization through events, campaigns, appeals, planned giving, or major gifts and donations) is a critical resource and risk area for many nonprofit organizations.
–Raising money with fundraising events. Events from gala dinners to school bake sales or charity auctions carry risks especially when events include cash transactions or transfers of material goods. Corporate giving to events often comes in the form of underwriting certain expenses or purchasing tables or tickets.
–Capital campaigns. Raising funds for the endowment or for a building fund and the construction or renovation that follows comes with unique risks.
–Selling products and merchandise. An arena for some nonprofits.
Working with Grants and Funders
For board members who are not used to working with nonprofit organizations, the whole area of fundraising can be fraught with confusion. Distinctions between general operating and restricted support are not easily understood. It can be hard to grasp the decision to request funding for general operations rather than for a specific program or activity. General support is just that—fungible resources that can be used for any budgeted expense from plumbing to printing to staff salaries. Restricted support can only be used for a dedicated purpose and is restricted in its use. General support is more flexible and easier to manage, but often donors prefer their support (and name) be associated with a specified or targeted use. Government grants are typically restricted in their use. The bookkeeping and accounting rules for the treatment of fundraising revenue are complex and often vexing to nonprofit boards and executives.
In addition to the due diligence you exercise in all areas of fundraising management, you will need to make certain that your board and staff, your volunteers, and the public from whom you solicit gifts, understand the laws, regulations and best practice in your region and your own policies and practices for fundraising. Failure to do so can jeopardize your entire operation. It is especially important to have a clear policy about how your organization raises money, how you calculate the tax deductible value of a donation and the purposes to which the donation is put.
This is particularly true if you are not experienced in the nonprofit world, and so there may be a period of adjustment. The vocabulary can be new and idiosyncratic. Here are some terms and concepts that are frequently used (and that we use throughout this book).
–Donations. Most nonprofit organizations solicit and receive donations to help support their operations. These donations may be treated advantageously for donors’ tax purposes. Nonprofits need systems in place to manage cash, in-kind and other donations.
–Bequests and Planned Giving. This term is used to describe donations that are planned for the future by the donor. A common type of planned giving is a bequest codified in a will. Most planned giving is set to occur at a future date, when the donor is deceased. Commonly, the terms of a bequest are not known by the nonprofit organization ahead of time. Favorable tax treatment of donor assets is a primary driver of planned giving.
–Foundation Grants. Proposals may be solicited and grant funding provided under the terms of a legal agreement or contract. Grant funds are often provided under terms that specify allowable expenses with an approved budget and reporting at regular intervals. Grants can be unrestricted, meaning that the nonprofit organization can use them as it sees fit to further its legal purposes. Grants may be restricted to specific purposes, such as rebuilding a church steeple, paying for a staff position or other program expenses. In some cases, certain expenses may be specifically excluded from the grant funding. Some grants are reimbursement grants where the nonprofit organization does the work under the terms of the grant, and the nonprofit is then reimbursed for allowable costs. A grant of this nature typically involves timelines for deliverables and payments. These may also be referred to by other names such as pay-for-performance or fee-for-service. In all cases, these grants involve the nonprofit organization doing something for which they have to pay (salaries, contractors, materials, and so forth). Their expenses are then reimbursed by the grant.
Grants can be simple one-time transactions for a single time-limited project, but they can also span multiple years and a broad geography and involve an ongoing relationship with the funder. Because foundation grants involve terms and conditions that are specific to the project to be funded, there is frequently discussion and negotiation between the funder and the nonprofit organization. Securing foundation grants and managing grants require formal policies, a grants management tracking system and training for staff involved.
The process of requesting funding for grants and other projects is governed by laws and regulations (for government grants) or by guidelines (foundation or corporate grants) so it’s an organizational imperative to know what they are. If you are soliciting support through a competitive selection process like responding to a Request for Proposal (RFP) making a mistake or skipping a step will disqualify you from the process.
–Fees and other payments. Nonprofit organizations may charge for services that they provide. They may be simple and direct charges—for example, the cost of a ticket to the opera or a weekly payment for child care. Remember that space and facilities rentals can be a source of revenue, so if your organization rents out space, a weekly desk to a companion organization for its own purposes, or some other rental or service, these are revenues, and are not considered as fundraising.
In addition to these terms, there is a variety of terms for the grants and other funding opportunities. Funding opportunities (the most general term) can be in the form of requests for proposals (you respond with a proposal), grants (you respond with a grant application), and other terms. In all cases, respond as directed in the initial notification. Perhaps the most serious risk to avoid is to not reading and understanding the rules of the application including all responsibilities you will assume for the project and the deadlines for applications and the project itself. Among the common problems are neglecting to obtain a formal resolution certifying the application from your board if it is required as part of the application.
What to Watch For
Fundraising risk is typically associated with the way in which a nonprofit organization handles its accounting, valuation of donated goods, grants management and its tax treatment of events and other activities.
–Because many nonprofits need support for programs or activities that do not match foundation priorities and because the process of applying for and managing grants requires staff that an organization does not have, some nonprofits forego grant funding altogether. This can be a sensible decision, but it is one that should be revisited periodically over time because foundation grants can be an important source of funding for start-up and program innovation.
–There are cycles and timetables for most fundraising opportunities. It is common for nonprofit organizations to solicit donations from individuals at certain times of the year—at tax time, to take advantage of tax deductions for donations, or in conjunction with religious or social holidays. Many nonprofit organizations hold events at the same time each year. Foundation grantmaking also occurs on an annual calendar cycle that is usually available on its website. In the US, regional associations of grantmakers or the Foundation Center are a good source of information.
Prevention
Fundraising activities are heavily regulated and the rules vary across jurisdictions. Your fundraising policies can cover how you handle transactions, acknowledgments for gifts or special occasions, tax letters, processes for handling donated goods, grant management, solicitation calendar and event management as well as your accounting policies. Policies should align with IRS regulations, charity bureau standards and the like and be reviewed and updated regularly. Fundraising activity and financial reports should be shared with the board or board committee quarterly.
Your fundraising practices and how you work with current and potential donors can be formalized and shared with staff and new board members. In a more general sense, review all of your practices and policies and make them available to staff and board. New hires and new board members particularly need this information as quickly as possible. Many organizations have a fundraising policy manual and annual fundraising plan. Others use a quick-start document to help new members get up to speed.
Like client or recipient information, donor information that includes giving history, credit card or other method of payment detail, home address is highly confidential and requires a data security protocol to keep it safe. Similarly, it is considered best practice to inform all donors that their name, contact or other personal information will never be shared with another organization. Most annual reports include highlights of the year’s activities. They can also include a list of donor names and corporate and foundation gifts.
–Does your organization have a current set of fundraising policies and procedures that align with local law or regulations?
–Do not assume that grant and donation opportunities adhere to past calendars and dates. Double-check submission deadlines for upcoming funding opportunities. This is as important for new opportunities as it is for grant renewals.
–An annual updated fundraising calendar with alerts that is shared with staff can prevent missed deadlines.
–In the case of complex grants that extend over time (and, possibly, over geographical boundaries), do you routinely review those conditions in grants for which you may be applying? Make certain that the facilities or other conditions that you need to carry out the terms of the grant are and will be available over the course of the grant. Not managing grants properly can result in refusal of reimbursement or other penalties.
–Make sure that the terms and conditions of a grant, donation or bequest are reviewed and approved before accepting it. This includes allowable use of funds, reporting, use of donor or funder name in materials and other terms and conditions.
Mitigation
–When a problem arises with a grant’s management, make certain that it is identified and dealt with as soon as you are made aware of it. These things do not go away by themselves. They happen, they should be watched for and prevented where possible.
–No matter how well-managed a grant is, its goals may not be achieved. Active management of funder relationships is key to securing private funds and maintaining them. Should you run into a problem with spending, deliverables or deadlines, notify the funder right away. If you need more time you can ask about no cost extensions or other changes to the grant. “Running out the clock” by spending the grant down when you know that you cannot meet its requirements won’t make funders very happy. Surprising your funder is a risk you don’t want to take.
Managing the Donor Base
Many nonprofit organizations have a core group of donors on whom they rely over time. In some cases, the donor base is considered a constant, and the amount that it raises can be the same each year. Changes happen over time, and it’s important to be ready for such changes.
For example, many traditional arts and cultural organizations notice a “graying” of their traditional donors, while environmental, “green” organizations have seen an increase in their donors as a result of demographic changes.
Assuming that an organization’s donor base Is constant and will always be there is a risk to be prevented. For both individual and philanthropic donors, requests for support only seem to increase, so there is always an element of competition for donations.
What to Watch For
–Do you track your donor base over time, checking for active, lapsed or deceased donors, amount of funds raised and change from year to year, and your donor demographic information? This data can help you estimate and set fundraising targets and where you might be in terms of donors and funds in the future.
–Changes to programming and services can affect your donor base because the two are tightly linked in many cases. Are you able to compare programming and service changes with changes in donor participation?
–Is the donor base diverse and large enough to be dependable? Having a single donor can be extraordinarily risky. In fact, a reliable donor base includes a mix of individual donors. Relying on donors from one industry, like financial services or manufacturing, may be risky if that sector experiences a downturn.
–Track what marketers sometimes call a churn factor—the amount and frequency with which people make donations or stop making donations or otherwise change their status. This concept of churning applies to staff, clients, and donors.
Prevention
–Do you know who your donors are? This means not just their names and addresses but what their interest is in your organization.
–Do you know who you would like them to be in the future (both long- and short-term)? Not only do you need to know and consider who they are (names and addresses) but also what they are (alumni, members, patients, and other demographics).
–Do you have specific fundraising plans, objectives, and goals that you track? This is particularly important for targeted fundraising such as for annual operating costs or development of a specific project.
–When donations of goods and services are offered, do you have policies in place to guide their use and acceptance? Many public libraries have a gift acceptance form that stresses that donated books are welcome (if they are) and will be used in the library’s best judgment. Grandma’s ragged copy of David Copperfield that is missing the last chapter may be donated, but the library must reserve the right to put it in a book sale or even in a dumpster. Donations of used technology equipment can be generous, but a computer that originally cost over $5,000 may have little or no value today, causing the recipient organization to basically be used as a way to dispose of the item.
–For in-kind donations, do you make it clear at the outset who determines what the value of the donated item is? In many places, the value of the donated items must be determined by the donor (not the recipient) for the purposes of the donor’s tax deduction.
For technology donations, your acceptance form should clearly state that any data on the donated device has been sanitized by the donor. Most organizations provide that type of notice and resist the temptation to take responsibility for purging data from the donated device. Security experts suggest that is the donor’s responsibility.
Fundraising Events
One of the areas in which nonprofits and nongovernmental organizations differ greatly in their operations and procedures is in their approaches to fundraising events.
A frequent fundraising topic of discussion is about the purpose of the event. While some people may consider an annual fundraising event to be a way of raising money, other people may consider it to be a way of bringing together supporters, board members, staff, and perhaps clients so that they can mingle with one another and informally discuss the organization and their support of it.
On the fundraising side of the discussion, some organizations hold a gala non-dinner or event to raise money. This gala non-dinner takes place at the time and place of a contributor’s choosing. The “admission fee” for such a dinner is a check payable to the organization; there are no speeches and no dressing up. At the other extreme are fundraising events that become a part of a community and perhaps overshadow the organization itself. People sometimes purchase tickets to the event without an interest in the benefiting organization.
What to Watch For
–In a case where the organization or a fundraising event has a long history or role within the community, recognize that although your balance sheet may tell you that it’s all about the money you raise, the fundraising event may have become a community event that is bigger than your organization. Here are some other risks you may encounter:
–It can be a challenge to match a fundraising event to the organization’s mission and ethos. Sometimes the choice is to leave all the work behind and celebrate, enjoy, or otherwise be distracted (while raising money). Other times, the choice is to highlight the organization with, perhaps, a special speaker or presentation.
–In the case of repeating events (perhaps annual fundraisers), approach changes cautiously, particularly if the annual event is the one time when many people interact with the organization. Considering cost versus funds raised may help with the decisions.
–Make certain that the invitations and tickets to fundraising events separate out and detail the cost of the direct benefit to the donor from the amount of the ticket. This is required for reporting and tax purposes and can also help donors consider their priorities.
Mitigation
With a large group of people, some will not be able to attend the event. Consider reaching out to people who you know will be unable to attend to fill them in on what will happen (or has happened) at the event so that they appreciate that they are part of the group. Otherwise, you run the risk of making them feel unwelcome. That is merely bad manners, but if people who feel unwelcome start to express that thought with their donations (or by sharing their opinion with others) you have created an unnecessary risk.
Summary
Nonprofit organizations are responsible for making certain that adequate resources are available for them to carry out their mission. Overall responsibility usually resides with the board and chief executive with assistance from staff and/or volunteers in a Development Department.
As you have seen in this chapter, revenue can be generated from planned events or from donations and grants. Each of these sources has its own risks; they share the common aspect that, in most ways, they are only issues for nonprofits and non-governmental organizations.