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The answer is net income, which is what you have left after fundraising and administration costs are deducted. Net income pays for your programs that make the world a better place. Our agency strives to maximize your net income so that you have more money for ministry.
The overhead trap
However, if you spend money on fundraising for anything and everything that has positive net income, you will fall into a trap. You’ll mail donors who are giving just a little more than it costs to mail them. Do too much of this in too many of your fundraising programs, and you’ll end up where I’ve seen many ministries: with a cost of fundraising rate of 20%, 30%, or even more. Add the cost of administration, and you can end up with an overhead ratio of 40% or more.
This isn't just a theoretical risk — I've witnessed it firsthand. An organization and its agency are trying to maximize net income to the extent that overhead ratios keep going up. At some point, the ratio gets so high that a negative news article blasts their mismanagement, a watchdog agency dings them, or a key major donor stops giving and cites high overhead as the reason. It is so easy to slip into this that it’s more common for an outsider to put their finger on a high overhead ratio than it is for the organization to realize it themselves. Many times a new CEO or new CFO will spot it quickly. In those cases, the existing team is usually defensive. “We’re growing.” Or, “We’ve always done it this way.”
Benchmarking for success
One smart way to gauge yourself is to look at your peers — other organizations who do similar work. What are their numbers? Are you in the same range? If you have a higher overhead ratio, do you have a compelling reason for it?
There are instances when a higher overhead ratio is justified. For example, we worked with a client on a groundbreaking donor acquisition campaign centered on a timely issue. This initiative temporarily increased their overhead, but it paid off significantly, raising millions in subsequent years. The key is having a strategic plan and understanding when a temporary rise in overhead can lead to long-term benefits.
Striking the balance
Ultimately, while net income is vital for funding your ministry, maintaining a balance between net income and overhead ratio is essential. By managing this tension wisely, you can ensure both financial health and mission success.
