Using Financial Models to Inform Fundraising Choices

Are you having difficulty helping your board (or your executive team) understand the implications of various fundraising tactics? Try using a financial model to help inform the decision.

Experienced development professionals understand intuitively how the choice of a particular mix of fundraising activities will impact the organization. After all, there are major differences between fundraising tactics relative to:

• How much money they bring in
• The costs associated with execution
• Time required by staff and volunteers
• When the revenue arrives and when expenses are incurred
• The kind of donor an appeal is likely to reach and whether donations are likely to become recurring
• Indirect benefits, such as visibility and corporate relations

However, when board members are involved in decision-making, the differences and the impact can be more difficult to visualize.

How a Financial Model Can Help

Several years ago, I was asked to facilitate a board discussion of the implications of various fundraising efforts. The executive director was concerned because the board was advocating for an expensive, low margin fundraising tactic. Her efforts to explain the drawbacks had failed.

I suggested building a financial model to help illustrate the pros and cons of various fundraising approaches, including the one the board wanted to pursue. While there were several financially-oriented board members she felt would appreciate the financial analysis, the executive director was worried that the less number-oriented board members might find their eyes glazing over.

With that concern in mind, I worked with the executive director to create a visually appealing financial model that could be used in our board discussion. The effort was successful. The numbers-oriented board members appreciated the financially-based discussion, and we provided them with a copy of the spreadsheet so that they could dive more deeply into the details. The other members of the board understood the visuals we used to help explain the impact, and still appreciated the financial foundation upon which the model was built.

By the end of the meeting, the board had agreed to a mix of fundraising approaches that were a better fit to the organization’s long term needs. In addition, the model established the financial objectives for each tactic, so that the board could hold the executive director and her development director accountable for outcomes.

How to Build a Financial Model to Inform Fundraising Decisions

A financial model helps board members understand the impact various choices make on cash flows and the organization’s goals. It can also help your executive team or finance team understand the expected outcomes of the fundraising approaches you are proposing.

If your own spreadsheet skills aren’t strong, consider partnering with someone who uses them routinely. Perhaps a member of your accounting or finance team, or a board member who is a banker or financial planner, would be willing to help you pull the spreadsheet together.

To ensure success, keep these tips in mind as you build your spreadsheet:

Plan, then build.

Before you even open Excel, Google Sheets, or whatever application you plan to use, think carefully about how you will use your model. It’s much harder to make changes after you’ve begun putting the spreadsheet together. Write down exactly what you want to accomplish. Do you want to have a general conversation, or make specific decisions? What do you want to say you’ve accomplished as a result of having built this model?

Set up your conversation to match your discussion format.

For example, if you are presenting the materials during a meeting using a projector, the spreadsheet should be easy to read from a distance. This may mean that you want to use multiple tabs to layout information, or that you’ll want to lay out your sheet so that all of the related data appears on one screen.

Consider the order in which you want to review information.

I often begin by reviewing important assumptions that will impact the decisions but aren’t directly related to the discussion of choices. For example, I might start by reviewing the organization’s strategic objectives and the money they need in order to achieve those objectives. Or, I might include budget data that indicates how much the organization has available to invest in fundraising initiatives.

Decide whether to use numbers or graphs, or both.

Most boards have board members with a range of learning styles. Some prefer numbers, others a verbal explanation, and others a graphic illustration of the point. As a result, your spreadsheet should include both numerical summaries of impact and graphs that provide visual illustration. In the brief case study above, I incorporated graphs more than numbers in order to keep board members engaged.

Use hidden spreadsheets for background data and calculations.

As you set up your spreadsheets, consider using hidden spreadsheets for data that is confidential (like compensation) or not essential to review (like basic budget information). Using this format allows you to manipulate this data if necessary, but keeps it out of sight. It also minimizes the numerical clutter on each page. If the hidden spreadsheet includes confidential information, be sure to lock it before you hide it so that no one is able to access it without permission.

Color code the variables.

When you are setting up your spreadsheet, use a fill color that stands out to let everyone know which variables you can change. For example, if you are evaluating which combination of fundraising tactics to use, you might have a yellow box next to each topic that allows you to write in “Yes” or “No,” the number of times you will use the tactic, or the date of the event. Color coding helps make sure you don’t inadvertently change a field that isn’t an option (such as the potential return a fundraising tactic might deliver), and that you consider each option under discussion.

Group assumptions together and back them with research.

Your audience needs to know what your assumptions are, and why you believe them. For example, if you are assuming that an annual appeal to previous donors will cost $19.35 per donation generate a 3.4% return rate, you should have a solid foundation for that assumption. Is this your historic performance? Or are you relying on data from the Direct Mail Association?  You don’t have to list your source, but you might want to include them in a comment box in case someone asks the question.

Lock fields that shouldn’t change.

Variables, such as the number of direct mail pieces you have, should be fields that you can change as a part of your discussion. However, assumptions, like the costs associated with a campaign, shouldn’t change. I recommend that these fields be locked so that they can’t accidentally be overwritten during the discussion.

Include all relevant variables.

As you develop the spreadsheet, consider the types of decisions you will be making. Are you discussing whether or not to pursue a tactic? Or are you also considering the timing of that tactic? What about the size of the audience you are pursuing? Be sure to include as many of the variables as are relevant to your conversation so that your model can accommodate the range of topics you plan to discuss.

Practice the discussion before you finalize the model.

Once you feel the model is complete, be sure to test it. Walk through the model and use a range of input to test its functionality. Do any of the outcomes seem incorrect or disproportionate? If so, you should check your formulas to make sure you aren’t missing something.

Remember that no model is comprehensive or perfect.

Reality is complicated. No model can incorporate all variables, or anticipate every outcome. The goal is to facilitate a conversation. No matter how hard you work to prepare a model, there will be something you wish you had done differently.

Revisit your goal.

Go back to the goals you wrote out as you began the process. Will the model you developed help you accomplish those objectives? If not, the model may still need some work. If it will, you’re ready to go!

Let Me Know How It Went!

Have you built a financial model to inform fundraising decisions? Share what you learned in the comment section on my blog.

If you like this article and want more help with planning, including financial modelling, please subscribe to my blog.

Do you have questions? Or would you like my help building such a spreadsheet? If so, please send me an email.