Finance: Advice line - Pesh Framjee on finance and governance

Q: We are incurring significant one-off fundraising costs - how can we explain the impact on our cost ratios?

A: One of the key areas of focus by the media and other commentators is fundraising ratios and the cost of raising £1. Many fundraisers complain that statutory accounts suffer from income being recognised in a different period to its related expenditure.

In reality, most forms of fundraising show very little correlation between what is reported as fundraising costs in a year and the actual amount raised. Cold mailings lead to poor or even negative cost ratios, but they generate new donors and ratios are improved in future years. Face-to-face fundraising, where donors sign up to pay a fixed amount each month, involves an upfront payment to an external company equating to several months' income. Costs will inevitably exceed recorded income at the year end, but in year two, there will be none at all.

Cost ratios are influenced by a number of factors and fundraising mix is an important one. Legacy fundraising, for instance, has the lowest cost ratios, while cost ratios for special events or dinners are much higher. Some, such as medical charities, do better at raising legacies than others, and this has little to do with their fundraising skills or effectiveness. These charities will have an inherent mix that predisposes to a lower fundraising cost ratio.

When presenting information on fundraising costs it is useful to underline and explain these issues, showing separately the one-off donor acquisition costs and/or highlighting the underlying trends. Some charities do this by producing information on their fundraising performance over a number of years.

- Pesh Framjee is head of the non profit unit at Deloitte and special adviser to CFDG. No liability arises to the author, his firm or Third Sector. Send your questions to pesh.framjee@haynet.com.

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