One of the more common misreadings of the fundraising cost-to-revenue ratio occurs when a multi-year grant is reported. While accounting procedures require that the entire grant (termed a temporarily restricted grant) be reported in the year it’s received, obtaining large grants usually takes consistent and concerted effort over time–often several years. So, because the revenue from a large grant arrives in a lump sum, costs may appear much higher as a percentage of revenue in the non-receipt years (see below).

Year 1 Year 2 Year 3 Year 4
Annual Revenue $1,000,000 $1,000,000 $1,000,000 $1,000,000
One-time three-year grant $600,000 0 0 0
Total Revenue $1,600,000 $1,000,000 $1,000,000 $1,000,000
Management & General Expenses $225,000 $225,000 $225,000 $225,000
Fundraising Expenses $100,000 $100,000 $100,000 $100,000
Total Supporting Services $325,000 $325,000 $325,000 $325,000

The United Way and the Combined Federal Campaign (CFC) require recipient organizations to keep their total management and general (M&G) and fundraising expenses to 25 percent or less of total revenue. As a result, nonprofits receiving any large contribution in any one year could be hurt. Although there are few exceptions to the United Way and CFC application requirements, it is always worthwhile for nonprofits to take the time to explain the variation and to explain it in every document going to any funder that might misread the ratios.

Expenses vs. Total Revenue
Year 1 Year 2 Year 3 Year 4
Total Revenue –$1,600,000     $1,000,000      $1,000,000       $1,000,000
Total Supporting Expenses–$325,000         $325,000        $325,000          $325,000
Percentage –20%               32.5%              32.5%                32.5%

M&G expenses more than likely will increase in years two through four as the nonprofit administers the grant, elevating these percentages even higher. But even if the nonprofit could stabilize these costs (in the example above), fundraising expenses would have to be reduced by 75 percent in order to pass the United Way and Combined Federal Campaign “tests.”

Thomas Raffa is founder and managing partner of Raffa, P.C. a consulting, accounting and technology firm based in Washington, D.C.