It is not difficult to understand that a nonprofit organization needs money to accomplish its mission. And yet, in looking at nonprofits it is clear that they are so much more than the money they have to invest in programs and initiatives around a particular mission or cause. Nonprofits are made up of passionate people that care about making a difference and serving others with whatever resources they have available. But how much they need and how much donors are willing to give them hinges on understanding how they can use what they have to do what they do, which is called their Return on Investment (ROI).
Without knowing what kind of a return a nonprofit can achieve it cannot secure grants or attract donors effectively. So, how do you calculate nonprofit ROI?
Tracking the Right KPIs
It is important to note before we get started that asking the question, “How does a nonprofit calculate ROI?” is just one small piece of a much larger financial puzzle. Demonstrating the kind of return that an organization can achieve may be important for convincing donors to maintain or increase their contributions, but what is more important internally is tracking the right financial metrics to ensure that the organization’s activities are achieving desired outcomes in a way that is sustainable.
As our team explains when talking about nonprofit leadership challenges,
“Knowing which kinds of reports to generate and which key metrics to track is a topic that every nonprofit will need to evaluate for themselves. What should be reported will depend on its fundraising sources, assets, organizational structure, and compliance requirements… Unfortunately, most organizations are only looking backwards with their reporting. Therefore, they are only answering the question, ‘Was what we did successful?’ not the question, ‘Will what we are going to do be successful?’”
Knowing which KPIs (Key Performance Indicators) are worth tracking on an ongoing basis and which methodologies to use in doing so is a vital part of being a good steward of the organization’s resources. Every organization will be different in terms of what they track, but a KPI like Cost of Funds Raised one common example of a metric that nonprofits usually track to understand their return.
> For more information on nonprofit reporting and financial metrics, you can reference our comprehensive resource: Understanding Nonprofit Reports & Reporting Best Practices
Understanding ROI for Nonprofits
Once an organization knows which KPIs to track, it can begin ROI calculations. Inevitably, some will be more complicated than others to calculate, and this is one area where bringing in experienced leadership can provide untold benefits. Let’s take a look at why:
ROI is an easy concept when you are strictly talking about money. For instance, if you buy something for $100 and sell it for $150, you have achieved a 50% return on that investment. But nonprofits are not typically dealing solely in money either on the input side or on the output side.
For example, if an organization has paid a paid staff member that spends 25 hours to organize a public event, gets $5,000 in donations to buy supplies, recruits 5 teenagers to help on the day of the event, finds 3 professionals to volunteer their services during the event, and serves 75 people with whatever program they are providing, what is their ROI? Things get tricky when we move away from a strictly monetary discussion, but they are not impossible.
The way you calculate softer inputs like volunteer hours and people served is by assigning a value to each. In the case of volunteers, if they are just people doing unskilled jobs like handing out flyers or signing in participants, you can typically use a minimum wage rate to account for their time. If they are professionals providing a good or service that they typically charge for, you can use their normal hourly rate (or their salary converted into an hourly rate) or the standard price of their goods to calculate their input. You already have the hourly rate of your employee to plug in, so now you have dollar values assigned to everything that went into the program you provided (your “investment”).
Keep in mind, this is a very small example. Organizations with more programs, larger staff needs, bigger events, and wider constituents will have far more complicated analysis ahead of them. Additionally, this is just one type of nonprofit return calculation.
Calculating Fundraising ROI
Sometimes when nonprofits talk about calculating ROI that they are referring to specifically is their fundraising ROI. Nonprofit financial leadership should carefully track how much of a return the organization is getting on its fundraising efforts. Everything from direct mailers and local sponsorships to annual fundraising events should be tracked to understand what is bringing in donations of time and money.
This is a fairly straightforward ROI calculation, but it can still trip up nonprofit leaders that are less financially savvy. For example, if your organization decides to host a big fundraiser to attract new donors, you know how much you spent to advertise and how much you got in donations and pledges at the end, right? Well, if you are not including all of the following expenses that your organization incurred:
- Phone campaign costs
- Design services for promotional materials
- Printing and postage for mailers
- Online advertising costs
- Local advertising
- Your staff’s time before and during the event
- Volunteer hours
- Entertainment at the event
- Supplies for the event
- Food and beverage at the event
- Branded materials to give away at the event
You are missing important inputs that are necessary for an accurate ROI calculation. In fact, depending on your organization’s accounting methodology, you may also want to include expenses for indirect costs (a percentage of your office rent, utilities, volunteer management platform, accounting software, website, etc.) as well.
Lean on your Director of Finance or CFO to track the organization’s ROI on various fundraising efforts so your Director of Giving or CEO can focus on the approaches that offer the best return. By homing in on your most effective fundraising activities you can ensure that you are generating the funds needed to keep doing the important work that you do.
When you need strong nonprofit financial leadership, let our team help. We provide CFO services for nonprofits to help them be better stewards of their funds so they can better serve their communities. Find out more today!