Second in a series: Creating Forecasts and Budget for Major Gifts

“She just needs to raise two times her annual salary in the first year, and we’ll be doing well.”

Jeff and I don’t know who came up with this idea, but it’s way off. It’s not based in reality on the revenue side or the expense side. Pure fabrication, and a crazy way to set up expectations for cost containment and revenue production.

I said in my previous blog, a MGO’s revenue numbers are driven by each qualified donor on the MGO’s caseload. This results in real numbers all the time.

The same is true on the expense side. But in our experience, the expense budgets of most major gift programs don’t include the total costs related to the MGO doing his/her job. Instead, managers use some multiple of the MGO’s salary to justify the MGO economy.

The goal in creating an expense budget for major gifts is to cover all the costs of the MGO… and we mean all. When you do it this way, it forces the first-year major gift economy to often look worse that the return in direct mail. Why? Because you’re front-loading all the non-recurring costs, like search and hiring etc., into the first year.

This is why we consistently show a lower ROI in the first year of major gifts than in the years that follow. Some leaders and managers have a hernia on this point, stating: “why would I start a major gift program that does worse than direct mail in its first year?”

Our answer: because once you get it going, your major gift program will (next to planned giving) deliver the best ROI and net revenue of any fundraising program you have. You simply need to start and then let it mature.

Don’t ignore this very important point as you budget for major gifts.

Our list of expense categories for major gifts includes:

1. The MGO’s salary — self-explanatory.
2. The MGO’s benefits — all of them.
3. Search and hiring costs — often left out of the equation and a one-time sunk cost. But someone must pay for it, and it belongs here.
4. Administrative assistant — Yes, each MGO should be supported by, at least, a half time administrative support person. Don’t leave this out.
5. Office operating costs — an allocation of costs related to the MGO space plus business card and office supply costs, etc.
6. Computer, phone, and communication costs – self-explanatory.
7. Travel costs including auto – many managers put these costs into a bigger budget category for the whole department. Not good. Put it with the MGO who incurs it.
8. Costs of entertaining donors – a very real cost that must be included and attached to the individual MGO who incurs them.

As a rule of thumb, the salary is the base cost. Then you add 25% of the salary to cover benefits. Then you add the salary and benefits number to get a subtotal and multiply that by about 30% for the other costs. Do your calculation both ways – the category-by-category costing and the formula we have suggested above. You’ll be surprised how close those numbers are to each other.

It’s important to make sure this expense number, by MGO, is right so that you set the right expectation for your finance team and the MGO. By putting the real costs in, right at the beginning, you are owning and disclosing the true costs of the effort. This is so important.

If you ignore this, you’ll run into future headwinds with all types of internal adversaries, not to mention a MGO who could be abused by some authority figure who, in a moment of frustration, says: “You do know that your true cost to the organization is X, far higher than people know.” And then the shaming and challenges begin.

It’s always good to know what things cost. And in the non-profit world we tend to do this thing where we don’t talk about it. This does more harm than good. Put it out in the open and do it right. Expense is a good thing. (Tweet it!)

Richard

Read the series “Creating Major Gift Forecasts and Budgets”

1. How to Create an Accurate Major Gift Revenue Forecast
2. How to Create an Accurate Major Gift Expense Budget (This Post)
3. What Return Should I Expect in Major Gifts?