Fundraising #5

[Guest guest]

Fundraising through accountability

 

Twenty years after ANIMAL PEOPLE began producing annual

financial reports on animal charities, ten years after our annual

ANIMAL PEOPLE Watchdog Report on Animal Charities handbook began

supplementing the bare numbers with further information, savvy

animal charity administrators know that being included helps them as

much as it helps donors. If they are achieving program success,

raising funds efficiently, and avoiding scandal, The Watchdog

Report affirms their accomplishments to the most serious donors, who

make the largest contributions and are often the most inclined to

leave bequests.

This is an encouraging shift from the atmosphere when we

started, when the prevailing attitude of animal charity directors

tended to be that the less donors knew about their operations, the

better. The Watchdog Report exists, and ANIMAL PEOPLE itself exists

in part, because people who care enough about animals to invest

substantially in animal protection want to know more about where

their money goes.

This is more than just wanting to ensure that donations are

not feeding direct mail mills and enriching overpaid executives, or

that charities are fronts for fraud. These are concerns, but they

are only worst case scenarios for experienced donors.

Cold solicitations from high-volume mailers would not have a

response rate of less than 1% if most recipients did not already

recognize and reject look-alike appeals from charities with similar

names, shocking photos and sob stories that have already been used

for decades, gimmicks such as coins and souvenir merchandise

included with appeal letters, envelopes designed to resemble bills

or government documents, and the zillion other ploys that often

route mailings to the trash, unread.

Serious donors have questions that go beyond their

letter-sorting response to the daily onslaught of appeals. In fact,

donors tend to have questions similar to those of investors in the

stock market, only slightly modified in recognition of the

differences in purpose. Both animal charity donors and stock

purchasers want to know about prospects for immediate results,

longterm prospects, past performance, unique attributes or

liabilities of the enterprise, the vision of the leadership, the

stability of the management team, the ratios of assets to earnings,

and the ratio of investment in promotion to product or service sales.

If the charity or corporation is engaged in multiple

activities, the donor or investor wants to know which activities are

the most productive, which show growth potential, and which are

obsolete.

In this regard, the differing responses of animal charities

and corporations to such questions tend to demonstrate why corporate

executives make more money.

To begin with, a corporation is sales-oriented. The first

thing anyone in sales learns is that, " The customer is always

right. " Fortune 500 companies not only routinely and easily disclose

the equivalent of all of the same information included on IRS Form

990, the accountability document that all U.S. charities are

required to file and make accessible, but go out of their way to

make the information easily available to potential investors.

While Fortune 500 companies zealously guard their trade

secrets, financial performance is typically an open book. A

potential investor, a business reporter, or even a university

student who expresses an interest in a Fortune 500 corporation will

soon be inundated in quarterly reports that detail the company

activity.

Only a handful of the 162 animal charities included in the

2009 Watchdog Report offer anything of the kind. About 25%--typical

of all charities, according to GuideStar--omit essential information

from IRS Form 990, or incorrectly report fundraising expenses.

Foreign animal charities commit similar omissions in

producing the balance sheets that they prepare in lieu of filing a

document such as Form 990.

 

The value of itemization

 

The most egregious omissions and errors involve attempts to

pass off the cost of high-volume, low-yield direct mailings and

telephone solicitations as " program " expense, in the name of public

education. But this is hardly the only major failure of

accountability that we see.

Nearly half the financial statements we review fail to

itemize program expenditures in any meaningful way--certainly not

like One Voice, of France, whose itemizations annually show exactly

what percentage of program expenditure went to each project that One

Voice supports. This presents a clear view of the One Voice

priorities, and will help to attract and keep donors who share these

concerns.

The Brooke Hospital for Animals and Society for the

Protection of Animals Abroad, both based in London, take a similar

approach with itemizations that show exactly how much money they

allocate to work in each of the different nations where they have

programs. Their audited financial statements, accessible to donors

at their web sites, also include specific breakdowns of how the

money was spent in each nation.

Contrast the One Voice approach with the Animal Welfare

Institute statement on each recent AWI filing of IRS Form 990 that

most AWI program spending--87% in fiscal 2009--went to " promote the

welfare of all animals, and seeks to reduce the sum total of pain

and fear inflicted on animals by humans. " Founded in 1952 by the

late Christine Stevens, AWI has never been credibly accused of any

kind of financial impropriety. This hazy description of program

activity is not an attempt to conceal anything--just a typical

failure to recognize the value of accountability as a benefit to

fundraising.

The IRS Form 990 filings of the North Shore Animal League

have since 1989 annually stood out as the most informative that we

see. Where AWI program activity is covered in just three terse

lines, North Shore provides a veritable yearbook. Each major

category of program activity is described in terms of expenditure,

returns, objectives, accomplishments, and history. Some of the

categories are broken down into sub-categories.

The North Shore filings are not glossy, like a corporate

prospectus, but they have always been compiled by people who

understand that to attract multi-million-dollar support, one must

present program information that shows how it will be used.

Forty years ago AWI was the larger organization. There are

many reasons why North Shore now has 15 times the annual donor

revenue, among which providing better program descriptions on IRS

Form 990 almost certainly ranks fairly low.

But North Shore pioneered another use of accountability as a

fundraising device that had a more demonstrable outcome. Instead of

charging a flat adoption fee for dogs and cats, as was traditional,

North Shore quit charging an adoption fee. Instead, adopters were

presented with an itemized list of the costs involved in preparing an

animal to be adopted, and were asked for a donation. After that

approach was introduced, the typical return per animal rehomed from

the North Shore shelter soared to half again what it was when a flat

adoption fee was charged.

Later, North Shore began setting adoption fees according to

the anticipated level of adoption demand for each animal. In

combination with presenting an itemized list of costs and requesting

a donation, this has more than doubled the average cash return per

adoption.

Former North Shore operations director Mike Arms now heads

the Helen Woodward Animal Center in Rancho Santa Fe, California, and

is among the most popular speakers at the Best Friends Animal

Society's No More Homeless Pets conferences. Having supervised

programs that have rehomed more than one million animals, Arms has a

seemingly endless inventory of techniques to share, but none do more

to increase revenue than his discovery that adopters will generously

respond to a specific invitation to help with specific line items, at

specific amounts.

" Vague appeals bring vague response, " Arms emphasizes. " Be

honest and tell the donor that spaying or neutering cost so much,

vaccination cost so much, kenneling cost so much, etc. Maybe the

donor can't help you with all of the expense, but usually you will

get some of it. Maybe the rest will come later. Give the donor a

list, and it will be remembered. "

Countless other animal charities now use variants of the

" itemized list " approach. Many ask donors to check off on a reply

coupon specific amounts that will go toward a specific purpose.

So long as the money is verifiably spent for the purpose for

which it is raised, itemizing requests can be especially effective

in attracting new donors, including in places where donating to

animal charities is a relatively unfamiliar concept.

Business people in particular understand contracts. A

donation made in response to an itemized request is in effect a

miniature contract, obliging the charity to do specific work. If the

work is done properly, and is seen to be done, each transaction

builds donor confidence, until eventually the itemized request is no

longer necessary because the donor becomes willing to accept on faith

that the charity is using good judgment and handling money in a

responsible manner.

 

The statistics that serious donors want

 

This is the financial data that we request of all

organizations listed in the annual ANIMAL PEOPLE Watchdog Report on

Animal Charities, based on the questions that readers ask us--

 

Donated & earned receipts

(not interest & investment income)

 

This should include all money received from program service

activities, such as adoption, sterilization, vaccination, and

boarding fees, plus all donations, grants, and bequests.

 

Expenditures

 

All of the money the charity spent during the fiscal year

 

Program cost

 

This includes all money spent to fulfill the nonprofit

mission of the organization, including the salaries paid to

employees who primarily or exclusively perform program service.

Often salaries should be divided between the overhead and

program spending categories. If a charity director spends half of

her time supervising animal rescue and half on fundraising and

administration, her salary should be allocated half to program

expense and half to overhead.

For an advocacy group, program cost would involve everything

by way of public outreach that does not ask for money as a primary

purpose. If an activity such as a mailing would not be done without

the expectation that it will raise funds or help expand the donor

list, it should be considered a fundraising expense.

Publications distributed almost exclusively to membership are

usually proportionately pro-rated. For example, the cost of

producing a newsletter would be a program expense, but the cost of

producing an insert catalog promoting t-shirts and coffee mugs would

be a fundraising expense, and therefore would be counted as part of

overhead.

 

Fundraising & administrative costs

 

In combined form, these two items constitute " Overhead. "

Overhead is the cost of fundraising and maintaining the

institutional infrastructure.

These include all expenditures necessary to maintain the

organization but not in direct fulfillment of the nonprofit

mission--for example, direct mailing expense, the cost of putting

on special fundraising events, administrative salaries, taxes,

legal fees, accountancy fees, incorporation fees, bank charges,

insurance, most legal fees (the cost of prosecuting cruelty cases

would be program service), most printing and stationery,

subscriptions, and proportional shares of other items such as

facilities maintenance, depreciation, and travel.

Travel can also be a program expense, if it involves sending

program staff to training or educational conferences that teach them

skills or on rescue and relief missions.

Depreciation can be a program expense, but it is more often

considered overhead. For example, if your depreciation cost

includes office equipment, that part of depreciation is part of

" overhead. "

Sometimes organizations claim to have an income, but no

fundraising expense. But trying to have no fundraising expense is

like trying to save energy by not breathing. Trying to pretend you

don't breathe is playing dead, and playing dead does not encourage

sympathetic passers-by to feed you.

Donors do not want to see you wasting money on excessive

mailings or telemarketing, but they do want to see you working hard.

Visibly breathing is expected.

 

Total net assets

 

This is the total value of everything the charity owns, minus

outstanding debts.

 

Tangible assets

 

These are land, buildings, and equipment.

 

Cash/securities

 

This is money in the bank and any investments in stocks or

bonds that you may have.

 

Receipts vs. program

 

The financial measure most used by charity heads is the

balance of donations plus program service revenue and unrelated

business income (such as receipts from running a thrift store or

selling t-shirts) with program expense.

The ideal is that the program budget should equal the funds

raised or earned within the year, while interest on reserves should

cover the cost of raising the money. Capital-intensive special

projects, such as building a shelter, should be funded by grants

and bequests.

If donations plus program service receipts fall short of

program cost, the program may be uninspired or poorly promoted. If

donations plus program service receipts far exceed program cost, the

program budget for the next year should be larger--but some charities

hoard rather than use a surplus, to have more interest available to

use to raise funds.

The " Receipts vs. program " measure favors charities that are

old enough to attract large bequests. If younger charities try to

build reserves big enough to pay interest equal to their fundraising

expense, they run a high risk of perpetually trying to raise more

money just to be able to invest more, to bring investment income

closer to their ever-climbing cost of attracting donors.

Program service may become a seeming afterthought,

and the main accomplishment of the charity may be enriching hired

fundraisers --especially if the initial fundraising investment was

borrowed from a direct mail or telemarketing firm, as often occurs,

with rising debt keeping the charity in bondage.

 

Program vs. overhead

 

ANIMAL PEOPLE assesses the balance of program versus overhead

spending by using a standard borrowed from the Wise Giving Alliance.

In general, ANIMAL PEOPLE finds that the Wise Giving Alliance

standards are highly unrealistic for animal charities, especially

the standards pertaining to governance, which were originally

written to apply to churches, schools, and hospitals serving

humans, who are capable of participating in directing the charities

meant to help them. However, the Wise Giving Alliance standard for

the balance of program versus overhead spending is applicable: that

charities should spend at least 65% of their budgets on program

service, not counting whatever educational value may be attributed

to direct mail appeals.

The average balance among U.S. animal charities, ANIMAL

PEOPLE has found by reviewing thousands of IRS Form 990 filings, is

that 72% of budget is spent on program service.

Groups which collect interest on large endowments tend to

have lower overhead because they can do less fundraising.

Shelters, sanctuaries, and activist groups which use mostly

volunteer labor and donated supplies by contrast may have " high "

overhead, if they actually do as much fundraising as they should be

doing, because much of their program work does not appear in cash

accounting. One way to deal with that problem is to assign an

appropriate value to donated labor and report it as a contribution in

kind.

The practice of ascribing some direct mail expense to program

service instead of fundraising reflects the common but erroneous

belief that " good " charities have the lowest fundraising costs

relative to program service.

 

--

Merritt Clifton

Editor, ANIMAL PEOPLE

P.O. Box 960

Clinton, WA 98236

 

Telephone: 360-579-2505

Fax: 360-579-2575

E-mail: anmlpepl

Web: www.animalpeoplenews.org

 

[ANIMAL PEOPLE is the leading independent newspaper providing

original investigative coverage of animal protection worldwide,

founded in 1992. Our readership of 30,000-plus includes the

decision-makers at more than 10,000 animal protection organizations.

We have no alignment or affiliation with any other entity. $24/year;

for free sample, send address.]

 

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