Managing Fundraising Risk

Created for GuideOne by the Nonprofit Risk Management Center

FACTS ABOUT FUNDRAISING

Nonprofit missions often depend on successful fundraising. Did you know that?

72% of all charitable contributions are made by individuals? (Source: Classy)
Volunteers are twice as likely to make charitable contributions than non-volunteers? (Source: Corporation for National and Community Service)

FUNDRAISING RISKS

A risk is a potential future event that could cause harm or significant disruption to your mission, reputation or key programs and operations. A wide range of risks are possible when a nonprofit solicits and accepts funding from individual and institutional donors. These risks include:

Failure to demonstrate that donated dollars were spent in accordance with donor intent
Failure to provide appropriate acknowledgements to donors
Penalties for failure to register in the state(s) in which you solicit donations
Lack of donor diversity (including type, age, interests, etc.)
Overreliance on a small number of donors
Allegations of improper accounting of donated funds
Unhappy donors who believe they were misled by the nonprofit
Breach of donor privacy through loss or theft of personally identifiable information
Failure to understand or forecast changing donor priorities and interests
Failure to proactively communicate your changing programmatic focus with long-time donors
Harm to a nonprofit’s reputation due to the actions or reputation of a donor

TODAY’S FUNDRAISING LANDSCAPE

To manage fundraising risks, it’s important to understand today’s changing fundraising landscape. Some of the aspects of that landscape include:

Increasing number of nonprofits – The nonprofit sector is large, robust and continues to grow. That means that there is tremendous competition for donor interest and financial support.
Competition – Every nonprofit faces competition. According to Melissa Mendes Campos, direct competitors are those organizations that ‘provide similar services to similar populations,’ while resource competitors are organizations seeking funds from similar donors.
Pressure to diversify revenue streams – Concern that a funding stream might ‘dry up’ creates pressure to continually diversify an organization’s funding sources.
Need to meet expectations of diverse funders and demonstrate impact – Institutional donors are increasingly asking nonprofits to demonstrate impact or ‘return on investment’—how funding enabled the nonprofit to improve the quality of life or make a difference for its service recipients. Some funders say they are increasingly focused on funding ‘outcomes’ rather than ‘outputs.’ For example, instead of confirming the number of programs or services you delivered in your community, a funder might desire evidence that your programs are truly improving the quality of life for community members.
Proliferation of special events – Special events have historically been viewed as an effective form of fundraising, which also enables nonprofit leaders to build brand awareness and reconnect with major donors. While some special events are highly successful in these respects, it is possible that relying primarily on special events is a misguided approach to fundraising. Nonprofit leaders must consider the net revenue of an event rather than focusing simply on the gross revenue; similarly, a strong indicator of a successful fundraising event is one that incurred a reasonable cost to raise a dollar (did the nonprofit spend more than one dollar in order to raise each dollar at the event?). Finally, some sector leaders oppose special events fundraising when it is touted as a way to build brand or cause awareness, as these returns are viewed as somewhat vague and cannot necessarily be clearly linked to raised funds.
Growth of cause-related marketing – Cause-related marketing refers to the marketing of products or services in a way that raises awareness and funds for a charitable organization. One study found that 83% of Americans will trust a company more if it is socially/environmentally responsible and 89% are between the ages of 13-25 would switch from one brand to another for a comparable product if the latter brand was associated with a good cause. (Source: Cone Millennial Cause Study)

5 TIPS FOR MANAGING FUNDRAISING RISK

1. Be Transparent and Responsive – From time to time, a donor to your nonprofit may be unhappy with the way their donation was handled, in the wake of negative publicity about the organization, or other matters. Although ignoring an unhappy donor MAY make them go away, that should not be an acceptable result! With care, concern and effort, you may be able to turn an unhappy donor into supportive, long-term mission ally. Fundraising consultant Carol Weisman offers the following helpful talking points for a conversation with an unhappy donor:

“That is totally unacceptable. May I have your permission to look into this and find out what happened?”
“Is there anything I can do to make this up to you?”
For additional tips from Carol on fundraising, visit www.boardbuilders.com

2. Adopt a Gift Acceptance Policy – To ensure that your nonprofit accepts appropriate gifts that align with your mission, establish a formal written Gift Acceptance Policy. Share this policy with your staff and inform them that all major gifts require vetting, and some gifts may not be appropriate to accept. Any gift that presents troublesome ‘strings’ or stipulations should be carefully considered. Even when your most enthusiastic or devoted donor is offering the gift, your nonprofit’s mission and reputation must be the priority of any decision around gift acceptance.

3. Process Fundraising Receipts with Care – Although sound financial management is important with respect to all funds managed by your nonprofit, extra care must be exercised in managing individual and institutional donations.

Train all staff who solicit funds on the nonprofit’s behalf on the nonprofit’s policy with respect to requesting and accepting restricted donations.
Faithfully honor donor intent. Item IV in AFP’s Donor Bill of Rights is the right “To be assured their gifts will be used for the purposes for which they were given.” (See: www.afpnet.org/ethics/enforcementDetail.cfm?ItemNumber=3359)
Train staff how to identify, record and report on expenses associated with restricted funding.
Track the conditions that must be met to satisfy donors of restricted funds. Donations are typically restricted by time (e.g., must be used this year), or by purpose (e.g., must be used to support youth-serving activities).

4. Choose Appropriate Fundraising Strategies – Only use fundraising techniques that are cost effective, ethical, consistent with the nonprofit’s culture, and that generate funds needed for vital programs and services. It is rarely if ever appropriate to adopt an ‘anything goes’ attitude about fundraising. In her article "Choosing your Fundraising Strategies,” Simone Joyaux recommends using nine criteria to choose between fundraising options and strategies:

Mission alignment
Direct and indirect financial cost (e.g., staff)
Prospective net profit
Relationship building
Institutional capability (e.g., skills and knowledge to carry out the activity)
Institutional capacity (e.g., human, technological, financial and other resources needed to carry out the activity)
Audience development/community outreach (e.g., introducing your organization to new audiences)
Risk analysis
Opportunity cost

5. Confirm Compatibility and Clarity Expectations – Corporate support for your mission can bring important services to life; however it’s important to evaluate and consider the motivations of a potential corporate partner, as well as the compatibility and expectations between your nonprofit and any new partner or donor. When you take the time to put expectations in writing, you go beyond simple altruistic motives, and clarity provides comfort and assurance to both the donor and the recipient.

Effective fundraising is key to sustaining the vital programs and services of your nonprofit. By exercising caution and care, nonprofit leaders can manage the risks that lurk in fundraising appeals, relationship building, and complex grant agreements. Although every fundraising operation experiences the occasional bump in the road, carefully choosing your fundraising strategies and evaluating their success over time will enable your fundraising team to drive donors’ financial and emotional support for your mission in the years to come.

*This information was created for GuideOne by the Nonprofit Risk Management Center