Fundraising Expenses

Fundraising expenses are the costs a nonprofit organization incurs to encourage and obtain contributions of money, securities, materials, facilities or volunteer time. They include the salaries of development staff, the cost of direct mail appeals and fundraising events, donor databases, grant-writing, online campaign platforms and the fees of professional fundraisers. Under US GAAP for not-for-profit entities (ASC 958), they are one of the main functional expense categories, alongside program services and management and general costs.

Fundraising expenses get close attention because donors, watchdogs and regulators want to know how much of each dollar given actually reaches the mission. They are reported both in a nonprofit's audited financial statements and on its annual IRS information return, where they appear in the statement of functional expenses.

An expense is classified as fundraising when its purpose is to solicit contributions. Typical items include:

• Salaries and benefits of staff whose work is soliciting gifts, such as major gift officers and development directors, or the share of time other staff spend on fundraising.
• Printing and postage for appeal letters and the cost of online advertising for donation campaigns, a form of advertising expense.
• Direct costs of fundraising events that are not benefits to attendees, such as venue hire for a gala.
• Fees paid to fundraising consultants, payment platforms and crowdfunding sites.
• Costs of maintaining donor records and preparing grant applications.

Activities that raise money through sales of goods or services, such as a charity shop, are generally not fundraising; their costs are recorded against that revenue. Costs of a special event that directly benefit attendees, such as dinner at a gala, are often netted against event revenue or shown separately.

Many activities serve more than one purpose. A mailing from a health charity might include both a donation request and information on recognizing the symptoms of a disease. US GAAP sets three tests, of purpose, audience and content, that must all be met before any of the cost of such a joint activity can be allocated to program or management functions. If any test fails, all the costs are treated as fundraising. If the tests are met, the organization allocates the costs using a reasonable method.

For example, a charity spends $60,000 on a mailing that meets all three tests. Two thirds of the content is educational and one third is the appeal. Using a physical units method based on lines of text, it allocates $40,000 to program services and $20,000 to fundraising, and it discloses the total joint costs and the allocation in its notes. Without meeting the tests, the full $60,000 would be fundraising expense.

Since ASU 2016-14, every not-for-profit must present expenses by both nature (salaries, rent, postage and so on) and function, in one place, which can be a separate statement of functional expenses, a schedule or the notes. Fundraising costs are recorded as expenses as incurred, even when the resulting gifts arrive in later periods, so they reduce the change in net assets immediately.

Two common measures are the fundraising ratio and the cost to raise a dollar:

Here $\text{Fundraising expenses}$ are total fundraising costs for the period and $\text{Contributions raised}$ is total contribution revenue. A charity that spends $150,000 on fundraising and raises $1,200,000 has a cost of $0.125, or 12.5 cents, to raise each dollar. Some watchdog groups, such as the BBB Wise Giving Alliance, have suggested that fundraising should not exceed 35 percent of related contributions.

Low fundraising costs are not always a sign of efficiency. New organizations, those building a donor base, and charities working on unpopular causes often have higher costs, and cutting fundraising can starve a mission of future funding. Critics argue that focusing too heavily on overhead ratios encourages misclassification of costs and underinvestment in staff and systems. Misreporting is a real risk: charities have faced state enforcement for allocating fundraising costs to programs without meeting the joint cost tests, so auditors review these allocations carefully alongside administrative expenses.