Rate on Investment (ROI) For Non Profit Organization

Rate on Investment (ROI)

What is ROI?

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the profit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula “gains from investment”, refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Monetary ROI

If we invest $100 on a product and later able to take out that $100 plus $10 more, the ROI =10%.

If we put $100 on product and later can only get $80, the ROI = –20%
We lost 20% of every dollar we put in.

 ROI in Nonprofits

In the world of volunteer engagement the inputs is money and volunteer time. The outputs is whatever service is provided, products created  or money raised etc.

If an organization spends $100 worth of money and volunteer time and in doing so produces $110 of value added to the community, the ROI = 110%

However, if an organization spends $100 worth of money and volunteer time and in doing so produces only $80 worth of value added to the community, the ROI = –20%. It represents a net loss of resources.

In previous post I have talked about Non Profit organization and there approach towards social media and where they fit in McKinsey levers. In this blog I will discuss how Non Profit organization calculate ROI and what the factors to be taken in consideration are.

Social Return on Investment

Non-profit organizations exist to achieve social and/or religious goals. Some non-profit organizations are very effective and efficient at converting money into the achievement of their social and/or religious goals. Others are notoriously ineffective and inefficient. Although it is not always easy to measure social return on investment, it is important to develop measurable indicators that allow the non-profit organizations to assess their social return on investment. There is a direct relationship between visible results and the willingness of people to donate and volunteer.

Financial ROI in Fee Charging Non-Profits that do not Solicit Donations

The business definition of ROI does have a number of direct applications to non-profit organizations as well.

Many non-profit organizations deliver products and/or services for fees. They differ from businesses primarily in their full reinvestment of profits into their organization. In many respects they are like “growth stocks” except there are no owners who will eventually reap a capital gain. For example, in the past there were many “mutual” insurance companies that functioned in this manner, although many of them have become for-profit businesses in the last few decades. ROI in these non-profits is similar to ROI in businesses, although it must be balanced with their social ROI.

Financial ROI In Non-Profits that Rely Primarily on Donations

Even non-profits that rely primarily on donations should consider the financial return on certain investments. For example, if they buy a facility, they should determine that the cost will be lower than leasing the same kind of facility and that the investment pays back more than, for example, an endowment fund. Money invested into various donor development programs need to be compared in terms of financial ROI.

Financial ROI In Fee Charging Non-Profits that also Solicit Donations

Private schools and camps are good examples of non-profit organizations that charge fees but also solicit donations. While social ROI is an important measure in these organizations, financial ROI is also very important. Many private schools and camps charge fees that cover the full cost of their operational and capital expenses and then solicit donations to fund scholarships for families that cannot afford full fees. Financial ROI can easily be measured in these organizations. In fact, financial ROI is an excellent tool for evaluating their financial “investments” program and capital areas. Money invested into donor development programs must also be assessed in terms of ROI.

 

					ROI ANALYSIS
Category of Fund Raising Activity	Fund Raising Investments	Number of Gifts	Amount of Gifts	Average Gift Size	ROI	Minimum ROI	ROI Variance Above/ (Below)
	A	B	C	C/B	D=C/A	F	D-F
I. CAPACITY BUILDING
1. Non-income producing capacity building	120,000	N/A	N/A	N/A	N/A	N/A	N/A
2. Donor acquisition (List or constituency building	380,000	13,400	275,000	20.52	72.40%	70.00%	2.40%
3. Special Events-public relations (Marketing/PR programs)	43,000	450	24,000	53.33	55.80%	130.00%	-74.20%
Total Capacity Building	543,000	13,850	299,000	21.59	55.10%	N/A	N/A
Fund Raising Costs %	181.60%
II. NET INCOME PRODUCING
4. Donor renewal, soliciting prior donors under $1000	162,000	28,000	940,000	33.57	580.20%	300.00%	280.20%
5. Special events – fundraising	123,000	600	320,000	533	260.20%	200.00%	60.20%
6. Major individual gifts (soliciting prior donors, $100 & up)	320,000	2,230	1,87,000	839	584.40%	400.00%	184.40%
7. Planned giving/estate planning (After 4 to 7 years of losses!)	165,000	13	650,000	50,000	393.90%	500.00%	-106.1%(2)
8. Capital and endowment campaigns	195,000	125	1,780,000	14,240	912.80%	650.00%	262.80%
9. Corporate and foundation grant seeking	85,000	16	480,000	30,000	564.70%	650.00%	-85.3%(3)
10. Government grant seeking	15,000	2	100,000	50,000	666.70%	650.00%	16.70%
Total NET Income Producing	1,065,000	30,986	6,140,000	198	576.50%	N/A	NA
Fund Raising Cost %	17.30%
Grandtotal	1,608,000	44,836	6,439,000	144	400.40%	N/A	N/A
Fund Raising Cost %	25.00%
(1) Below minimum ROI, try to improve ROI, study cost benefit.
(2) Below minimum ROI, only in 3rd year, expected to improve.
(3) Below minimum ROI, try to improve ROI, study cost benefit.

DOES ROI EVALUATION HAVE TO BE SO COMPLEX?

Unfortunately, complex questions require complex answers. On the surface, the basic question appears simple: “How can we know if the returns on our investments in various fund raising activities are reasonable?” However, there are many answers and they all depend on several variables.

The ROI Analysis has ten different categories of fund raising activity. Each one is different from all the others, depending on its purpose and/or source of funds, and for each one there is a different answer to the basic question of reasonableness.

Experienced fund raising managers know how to plan and implement very sophisticated or complex fund raising operations and programs. The sophistication (complexity) is increasing constantly. However, the way most nonprofits currently budget, account for, and evaluate fund raising costs and related income is not only uncomplicated but also unsophisticated and not very useful for decision-making.

The time has come for the nonprofit sector to take a more sophisticated and business-like approach to these aspects of fund raising management. While the need for community services is growing rapidly, government is cutting back and the burden of fund raising to meet community needs is falling more heavily on nonprofits.

Nonprofits that find it too burdensome to analyze the ROI of their fund raising programs could compare themselves to for-profit businesses. It would certainly be easier and less complex for businesses to only measure and evaluate their overall, year-end profitability. But for-profit organizations are usually far more successful when they measure the profitability of their various products and/or services separately and do so more often than once a year.

Decision-useful evaluations of fund raising activities require complex but accessible evaluation procedures broken down by categories of fund raising activity and gift size ranges. The methodology presented in this paper is the most useful procedure for management’s evaluations of fund raising return on investment. True, they are complex, but they are not inaccessible to the conscientious fund raising professional.

ROI Poetry 🙂

Examples of ROI in Action

• ƒƒOne U.S. government agency estimates that adding a frequently asked questions (FAQ) page to the web site
  saves nearly 400 work years annually for staff responding to citizens’ questions by telephone or in person at
  agency field offices.
• ƒƒAn Australian government agency found that banner ads costing $40,000 resulted in 145 visitors downloading
  forms from their site at a cost of $275 each. Since 60 percent of their site traffic came from searches, they
  used Google Ad Words for the next campaign. After spending $40 for pay-per-click (PPC) search to promote
  downloading forms from the Web site, they had 294 form downloads. This was more than double the number they
  had using banner ads at 1/1000 the price.

Recommendations

Public-sector and nonprofit organizations can follow this approach for evaluating the effectiveness of their web sites.
The biggest challenge, in most cases, will be determining which measurement units will yield the most reasonable
analyses of resources expended and benefits gained. While for-profit methodologies do not necessarily translate
well for noncommercial settings, they can be used as models for public-sector and nonprofit organizations.

Reference

What is ROI

Web Analytics Key Metrics and KPIs

ROI Calculator

Hubbard, D.W. 2007. How to Measure Anything: Finding the Value of “Intangibles” in Business. Hoboken, NJ; John
Wiley & Sons

Facebook ROI

Social Networking ROI Calculator for Nonprofits

ROI for Volunteer Programs

 

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