Donors and other stakeholders continue to look for more accountability and transparency from nonprofits, especially regarding fundraising. Not only is the sum of money raised in campaigns meaningful, but how efficiently you’re able to raise it, too.

Interested parties look beyond total dollars raised to also consider associated costs in fundraising efforts. Cost ratios that present fundraising costs as a percentage of funds raised (also known as cost-per-dollar) focus on the expense of fundraising, while return on investment (ROI), importantly, focuses on the returns. It makes sense to track both.

Determining ROI vs. cost ratios

The formula for ROI uses the same inputs as the cost ratio but flips them:

ROI = Fundraising revenue / Investment in fundraising (Fundraising expense)

Focusing not only on the big picture but on specific fundraising activities will allow your organization to identify its weaker methods and strategies and improve its overall fundraising performance. Which of your fundraising activities generates the highest return? Once you establish a baseline, you can see where your results are improving and which programs are most effective.

Some organizations feel it’s more meaningful to measure gross revenues raised compared to the fundraising expenses for that effort. However, many follow a more traditional method of measuring ROI using net revenues (revenues minus the related expenses) when comparing to costs. Either way is OK, but you must be consistent by measuring your revenues in the same way for each year and campaign. And remember, these metrics are only meaningful when you compare fundraising activities or trends from one year to prior years.

Calculating the inputs

There are other considerations. How, for instance, do you compute your “fundraising expense”? Although the revenue information is easily available to your development staff, your accounting staff should be recruited to gather data on expenses at the same level of detail by campaign or fundraising effort.

Your fundraising expense should include the direct costs of the initial effort, as well as later efforts. Initial costs might include the investment to create a new donor relationship (for example, online advertising costs or the costs of a phone campaign), while subsequent costs include those associated with maintaining that relationship (for instance, the costs of a renewal mailing).

What about indirect or overhead costs? Be consistent! If you exclude those that you would incur with or without the monitored activity, such as the costs for your website or donor database, make sure they are excluded from every campaign metric. For both costs and revenues, you should use rolling averages that cover three to five years. This will reduce the effect of “one-offs,” whether in the form of a significant donation or an economic downturn. You’ll also avoid penalizing fundraising activities, such as a major gift campaign, that require some time to show results.

Calculating these metrics will help you make better decisions when it comes to allocating your fundraising resources. But keep in mind that ROIs can vary greatly by activity, and a lower ROI doesn’t necessarily mean you should cut the activity. One fundraising expert suggests striking a balance between high-cost, high-potential long-term activities and low-cost, short-term activities.

A win-win scenario

Going to the effort of computing the cost ratios and ROIs is a win-win. With this information in hand, you can make more informed decisions and satisfy your stakeholders. Your CPA can help you in these efforts.

Every organization, whether for-profit or nonprofit, is at risk of falling victim to costly acts of fraud. Nonprofits, though, have some common characteristics that make them particularly susceptible to such schemes. Fortunately, you can help combat the risks at your nonprofit by implementing some simple controls.

Weak spots

Nonprofits tend to operate in a culture of trust and rapport, and that is one reason that they are attractive targets for fraud perpetrators. Organizations are often founded by a handful of passionate and idealistic volunteers and develop over time into a team with tighter relationships than typically seen in many for-profit businesses. As a result, management may not feel the need for antifraud controls, or they find it hard to ask tough questions when confronted with possible signs of fraud.

Similarly, many nonprofits place significant control in the hands of a limited number of people. This is a risk even in an organization with some internal controls, because more powerful individuals within an organization can simply override the controls, with lower-level staff too intimidated to intervene.

Nonprofits that have a lot of cash on hand, either in the office or at remote events, also can run into fraud problems. Cash has a way of disappearing into people’s pockets, especially at events held without proper accounting procedures. Creating a paper trail, with numbered tickets or receipts and multiple people involved every time cash is handled, helps mitigate the risk.

These are not the only factors that make nonprofits so vulnerable to fraud. High turnover among staff, volunteers and board members, as well as limited resources, also may contribute.

Suggested controls

Internal controls in the form of strong policies, procedures and governance are a must for every nonprofit, regardless of size. Controls can help deter and detect fraud.

Perhaps the most critical control is segregation of duties. A single employee should never be responsible for all the steps in any accounting process — for example, collecting, recording, reconciling and depositing cash receipts. Segregating duties can be a challenge for smaller nonprofits. But, at the very least, the duties of handling and reconciling funds should involve more than one individual. And a separate individual should receive and review bank statements. If your nonprofit lacks the manpower, consider including board members or outside advisors to segregate duties.

Nonprofits also should conduct background checks on board members, employees, volunteers and anyone else who might handle cash. The checks should encompass credit history, references and criminal history and be updated periodically.

Governance plays a role in deterring and detecting fraud, too. Your board of directors must perform proper oversight by, for example, naming qualified individuals to independent finance and audit committees. It also should set an antifraud tone by developing — and enforcing — policies on matters such as conflicts of interest and the treatment of whistleblowers.

The Association of Certified Fraud Examiners has consistently found that tips are the most common (and low-cost) detection method for occupational fraud. It is best if tips are reported to the board or one of its committees, rather than management. The organization should make an anonymous fraud hotline available to employees, volunteers, vendors and clients.

Finally, you will need to formally educate your employees about fraud. You should provide training on the organization’s antifraud policies, red flags that could signal fraud and how the hotline works. Board members and volunteers with financial responsibilities should receive training, as well.

An ounce of prevention …

You can not prevent all fraud — no organization can. But you can reduce the risk of substantial fraud losses by recognizing your vulnerabilities and taking appropriate steps to mitigate them and to investigate thoroughly when fraud is suspected. Choosing to ignore fraud and hope for the best may result in suffering both financial and reputational damage.

The IRS recently announced a reduced user fee from $400 to $275 for filing the simplified form for recognition of tax-exempt status, Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ is shorter (only two pages) and more user-friendly than the regular Form 1023. The reduced fee became effective on 7/1/16.

To determine whether you are eligible to complete this simplified form, read the form instructions and click on the Form 1023-EZ Eligibility Worksheet link in the instructions.