Steps to Creating Your Major Gift Forecast & Budget

By Richard Perry

The Economic Destination of a Caseload There are smart destinations and poor ones in major gifts.

Jeff and I had one situation where the Director of Development and all of her MGOs had only one objective for each donor on each caseload: to build relationships with donors and not ask for money.

Now the first part of that objective isn’t too bad – to build relationships. And that is a smart destination. But the second part – not asking for money – is really a poor choice. It’s no wonder that each of the caseloads in the care of these MGOs and their Development Director were in such horrible shape that someone should have been fired.

When we asked why they had added the bit about not asking for money, the DOD said: “Well, if we build solid relationships, then the money will come.” We pointed out that the money hadn’t come and asked if they had really built solid relationships or was there something else missing – like asking?

The look on the DOD’s face could have owned an Oscar. It was like asking was a foreign concept. I think you will agree with me that everything about this situation was unfortunate.

Which brings me to a core question every manager of major gifts and every MGO should have a proper answer to – what is THE critical objective of major gifts? Put simply, it’s:

To secure funds for the organization by fulfilling the interests and passions of key donors.

Jeff and I have been talking quite a bit about what it means to fulfill the passions and interests of donors – the key reason a donor parts with their money. Call this side of the caseload coin the passions and interests dynamic – the donor centered side of the coin. If you don’t do things properly here you will lose the donor.

The other side of the coin is the organizational side – the economic side. If you don’t do things right here you will lose money.

Think about this for a second. There are two things you are trying to do in your caseload work – fulfill donors needs and passions AND secure funds to operate your programs and the organization.

I find that way too many managers focus on the first part and not the second, which is why you have well-meaning DODs like I mentioned at the top of this post who spend their time building relationships and not raising money and feeling good about it.

This just does not work. And often MGOs and their managers hide behind the relationship thing as an excuse not to raise money. This is not right and should not be allowed to continue. The fact is that the quantifiable goal of a MGO is to raise money. Period. If you don’t do that (at an acceptable ROI) then you are failing.

So, all this to say… a caseload has its own mini economy that must be managed for organizational purposes.

I like to look at that economy in a couple of ways. First, the cost side:

Let’s say these are the operating costs of one MGO in a medium sized non-profit. If your numbers are different, use these categories to figure out your annual costs. Let’s also say there are 150 qualified donors on the caseload. Now note that the cost to service ONE donor is $1000 a year.

This is an important figure to keep in mind. Here’s why. If a MGO clearly understands that there is a REAL cost to relate to one donor, that MGO will realize that there is an economic consequence to not taking care of the donor. It is actually costs the non-profit money! This is an important data point for a MGO and his/her manager.

Next, the revenue side:

Let’s say the qualified caseload breaks down into A, B, C donors as I have designated in the chart above. Several things to note here. There are fewer A donors but they have higher value; the caseload value is $1.5 million, and; the average revenue per donor is $10,000.

Now, putting cost and revenue together, take a look at this chart:

Here are the 150 qualified donors. Some of greater value – others of lesser value. They each cost, on average, $1,000 to service. And the net revenue from each is different.

Now, one sharp eyed critic, when he saw this chart, pointed out that the cost to service an A donor would be higher than a B donor etc., making the ratios turn out differently. This is true and you can adjust the math to allocate cost properly.

But here are the points I want to communicate to you in this post:

1. An MGO should understand it costs money to manage a donor. Real money. If they understand this it should motivate them to steward their time and efforts to manage each donor on their caseload.

2. An MGO should understand that the donor must yield revenue in excess of what it costs to service them or there will be nothing left to give to the organization. There are exceptions to this. For instance, you are managing a relationship that will take two or three years to reach its potential. In this case you may lose money for a time before getting into a positive net revenue situation. But be sure there is real potential there. I have seen too many situations where a MGO chases a high capacity donor only to have wasted time and money.

3. An MGO needs to walk away from a situation where the donor gets what she wants but the organization doesn’t. This one is difficult. But it is true. You cannot be in a one-sided relationship with a donor where everything is going her way, but very little, in terms of economic return, is coming to the organization. It is not good stewardship. It is not what you are hired to do. And further, it is not right.

So, a smart destination for caseload and donor management is to have relationships with donors where:

• The donor gets their passions and interests fulfilled. • Net revenue results from that relationship that funds the programs and operations of the

organization. • And this is all done at a reasonable ROI (return on investment).

Do not let yourself love either side of the caseload coin more than the other. You must deliver on both sides. As a professional MGO you must deliver on fulfilling donor passions and interests AND you must deliver on securing revenue for the organization at a proper cost.

You cannot do one at the expense of the other.

Creating Forecasts and Budgets for Major Gifts Did you yawn when you saw the title of this blog?

I mean, who cares about forecasts and budgets for major gifts? Certainly a MGO doesn’t have any interest in this topic, right? But you should, because it creates one basis for your job evaluation.

If a major gift budget and forecast is wrong and you are hired to deliver within that faulty context, you run a very real risk of getting fired for not delivering. So, I suggest that it is a wise thing to get familiar with this topic, and pass it on to your manager and CFO.

There are three steps to creating the proper forecast and budget for major gifts:

1. First, for each MGO create a mini forecast. There are two types of MGO forecasts, one for the new MGO and one for the existing MGO. Let’s start with the new MGO. It is important to remember that the first eight months of a new MGO’s performance is spent mostly on qualifying donors. Take a look at this chart to get the full impact of what I am saying here.

You start with a pool of donors BEFORE the first month of the MGO’s start, and then you see how the qualification process slowly but surely adds donors to a qualified caseload. Note that there is a ratio of about 1 qualified donor added for every 3 donors in the pool. I have put the worst case for qualifying timing in here, and I suggest you use this timing for your first-year budgeting, to set the right expectations for your new MGO.

OK, so here is how this all works: Let’s say your budget year is July to June. You hire your new MGO in June, and you have a caseload pool already identified for the new MGO to start working on in July, the first month of your fiscal and budgeting year. Because of the ramp-up shown above, you know that the new MGO will not be fully functional until the 8th month of your fiscal year. This also means you must produce a forecast that reflects that reality.

Here’s how to do it. For the new MGO, take the average annual cumulative giving for all the donors in the caseload pool, multiply it by 150 donors (this is the qualified donor goal) and then adjust the resulting number for how long the MGO will be qualifying donors in your budget year. Let’s assume that the average cumulative giving for the caseload pool is $2,000. Multiply that times 150 qualified donors. That equals $300,000 for a fully functional MGO for one year. Then take that $300,000, divide it by 12 months and multiply the resulting number by the 4 months the MGO will be fully functional.

That number is $100,000. Put that number in your forecast and set the proper expectation for leadership and finance. The point here is that you cannot submit a forecast for a new MGO as if they were a fully functional MGO. There is a huge difference. That is why you have to do a forecast for each MGO on your team and take their life cycle into account when you do it.

Now it is true that, as the new MGO is qualifying donors in those first eight months, those donors will produce revenue that has not been counted in the forecast I recommended above. That is your safety net or contingency fund. I would rather set a very low expectation for the MGO’s first year and surpass it, rather than fail. I think you would as well.

For a fully functional MGO, the forecast is different. Here are the steps to take in that situation: Sit with the MGO and go through each donor one by one and attach a reasonable yet aspirational goal to each one. Total all the goals, and the resulting number is your forecast for that MGO. (Read more about setting individual goals for donors here.)

2. Create your major gift revenue forecast. This is done by summing up the individual goals from all the MGOs, new and fully functional, as well as MGOs you intend to add in the fiscal year. If you are aware of any large or transformational gifts that may come in, you might add them to your forecast – although I would be careful to make sure your leadership understands that you have a core revenue forecast they should depend on, and the aspirational forecast may or may not happen.

3. Create your major gift expense budget. I know this is pretty basic, but you would be surprised at how many budgets Jeff and I see that do not include all the expenses. So when you create yours, be sure you include compensation (salary plus benefits), search and hiring costs if applicable, administrative assistant costs, operating costs like office, computer, phone, travel, entertainment, auto – any cost related to the MGO doing his/her job. I suggest you sit with your CFO and ask for help on what other costs should be included in your expense budget. That way the CFO is part of your process and owns the result – always a good thing!

These are three relatively easy steps to take in creating a major gift forecast and expense budget. The most difficult part of the exercise is the revenue forecast – which you must be very careful about, since setting too high of an expectation will cause major problems for you and the organization.

But good planning, as I have suggested here, will create a realistic and conservative financial basis for your management to operate with. And that’s good for you.

How a Caseload Grows Over Time It is so interesting to me how people outside the major gift process think about how a caseload of donors performs and grows over time.

There are some pretty big misconceptions out there. Here are some to consider:

1. There will be no attrition either of value or donors. The folks that hold to this idea don’t realize that there is already huge attrition – usually in the 40-60% range. Just slowing that down from year to year is a big accomplishment.

2. The MGO will not need to add new donors. Not true. At least twice a year a caseload should be reviewed and lower performing donors should be removed. Also, as time passes, new donors will arrive on the scene who have higher value and potential. They will need to replace lower value and low potential donors on the caseload.

3. All donors have the same potential to give really big gifts. Nope. Only a few donors on a caseload will eventually give your organization a truly sizeable gift. And it will take time to find them and cultivate them.

4. All donors will upgrade and give more each year. No they won’t. In fact, one of the main objectives of an MGO, with most of his or her caseload, will be to maintain value year over year while upgrading some of the donors. Remember, donors left to the direct marketing program demonstrate attrition in value at an alarming rate of 40-60% the first year and 25-50% in the following years. That means hundreds of thousands, even millions, of dollars are going out the door. Just stopping that attrition is found money, as we mentioned before.

So, how does the caseload grow? Take a look at this chart which is my attempt to graphically explain it:

The gray box in Year 1 is the set of original 150 qualified donors giving $800k. You see how their numbers demonstrate attrition over time. Note that the attrition slows down. Don’t get bogged down on the numbers and whether they are accurate. The point is that attrition does happen, and it does slow down if you are managing your donors properly.

The gold box in Year 2 represents replacement or new donors, and the gray box has grown a bit, showing the increased value of older donors. You will see that these donor numbers demonstrate less attrition over time, and the donors are of higher value.

And the yellow box in Year 3 are, again, replacement or new donors. Again, the value for retained donors is going up, and the attrition is going down.

The point is that the quality of the caseload is increasing over time while the value and donor attrition is decreasing.

This is all more complex than this simple chart. But the main points are:

• As MGOs touch and relate to donors, they will stay longer and not reduce their giving. • Some of the donors will increase their giving slightly. • A very few of the donors, maybe 1 or 2, through proper cultivation, will give substantially. • And all of this put together is what makes the caseload grow.

This all may sound way too basic or simplistic, but it isn’t. It’s why Jeff and I suggest that an MGO needs to stay very focused on his or her caseload, nurturing and caring for each donor and making sure each donor’s passions and interests are served and fulfilled.

When an MGO does that, some wonderful things happen, not only in relationship, but also economically. As we said before, money is the RESULT, not the objective. It comes out of caring for the donor. And as your care increases, so will the donor’s loyalty and giving.

Old Money vs. New Money There is nothing that causes a bigger debate in the major gift business, next to who gets credit, than the subject of old money/new money.

A couple of months ago I was meeting with a CEO of a very large non-profit. He got so heated in his discussion with me on this topic that he got up from behind his desk, walked around to get closer to me, pointed his finger in my face and said: “Richard, all I want is new money from those MGOs! NEW Money!” And what he meant by new money is money above what the donor had given before.

So, I pulled out the chart below and said: “Ralph [not his real name], take a look at this chart. Here are 150 donors that the year before gave $1.9 million and last year only gave a little under

$800,000 for a value lost of $1.1 million dollars!! You actually lost over 59% value from these donors. Don’t you think that if the MGO recovered some of that $1.1 million that you lost that that could be considered new money?”

“Nope, Richard. That won’t do,” he said. “I want NEW money!”

Goodness. Am I missing something here? The man has just lost $1.1 million dollars and it doesn’t matter to him if we recover even half of it? Something is wrong here.

This whole topic boils down to just a few points:

1. Most management and finance folks don’t know that value attrition (the money we get from the same donors from year to year) runs from 40-60% for those donors that are not regularly managed and touched. This means that hundreds of thousands of dollars, often millions, are just slipping out the door. I hope you understand what I am saying here. The same donors are giving 40-60% LESS in just one year!

2. These same people don’t understand that an MGO just managing the caseload can bring that loss to practically nothing. Jeff and I are happy if the loss is just cut in half. In other words, in the example above, if by managing the donors the MGO could recover just half of the $1.1 million loss, that would be an achievement.

3. This reduction of the loss is what we call “found” money. While it is different than “new” money, which is money above and beyond what the donor has given previously, it still, in our opinion is the same as new money. We would not have it in our possession had we not managed the relationship.

4. Therefore, a MGO, through their efforts, contributes in two ways: (a) recovering lost money, and (b) finding new money. Jeff and I believe that this is how a MGO’s performance should be measured.

So, as you are going about your business today, take pleasure and fulfillment in knowing that as you touch a donor, through various “moves”, you are retaining money that otherwise would have been lost. This is an actual fact that has economic value.

And it is something that very few people know and appreciate.

Hiring Administrative Support There is a raging controversy on administrative support for Major Gift Officers (MGOs) going on right now that doesn’t make any sense to me.

The conservative managers/leaders are saying, “A MGO does not need support to do his or her job!” They are emphatic about it. These are the same folks who are wanting the MGO to be OUT OF THE OFFICE!! I capitalized that because that is how STRONGLY they feel about it.

Does anyone see a conflict here? They want the MGO to be out with donors while they want the MGO to do all the in-office work necessary to make the major gift effort successful. Crazy.

So, the proponents of the traditional argument believe that a MGO does not need administrative support – that solid revenue can be secured and donors can be properly cared for without this critical

support. The managers who are less risk-aversive believe that admin support can be shared with other MGO’s and even with other executives/positions.

While extenuating circumstances, at times, may lend credence to the notion that a MGO can be effective without support, I am going to make an economic case against that view.

First, some definitions. I have created three scenarios. All of them assume a starting first-year caseload value of $1 million. Please keep this in mind as you read on:

• The fully dedicated scenario: here the MGO has a fully functional, 100% dedicated administrative assistant.

• The half functional scenario: here the MGO has an admin assistant, but that assistant, either because they are shared and/or they are not fully competent, is operating at “half” level.

• The no administrative support scenario: here the MGO does not have an administrative assistant.

So keep these three scenarios in mind as you read on.

The next thing to keep in mind is that we are starting with a caseload that has 150 qualified donors who collectively have given the organization $1 million. This means the caseload value in the first year is $1 million.

Assuming certain cost and donor value attrition factors, which Veritus Group has tracked for a number of years, here is the NET second year value of the $1 million we started with in the original caseload:

The result is that having a fully dedicated administrative assistant who is fully functional vs. not having one at all netted the organization $289,900 more dollars! And the ROI was 4.5:1. For every dollar spent on the MGO and his or her administrative support $4.50 came back. That’s pretty good.

Note also that having a fully dedicated and fully functional administrative assistant is 200,000 NET dollars better than having a HALF functioning administrative assistant.

So there are plenty of arguments why a manager should equip his or her MGO’s with a fully functional and competent administrative assistant.

Now note that the HALF functional vs. NONE scenario nets the organization an additional $89,900 at a ROI of 3.6:1. This is still better than not having an assistant.

Lastly, the NO administrative support scenario nets the organization $331,350 at a ROI of 3.8:1 which from a ROI point of view is better than the HALF functional scenario, but is $89,000 less in net revenue.

Here is the point of this whole exercise. It is far better, from a ROI and net revenue point of view, on a caseload of $750,000 or more (in some cases less), to have a fully functioning, competent administrative assistant.

Here is how I arrived at my numbers. First the cost side of things:

The chart above shows what I have put into the cost side of the ledger. I am assuming benefits equal to 25% of salary. I have also put in “operating costs” which for the MGO include office and travel and for the assistant include office expenses. Note the totals for MGO plus assistant and MGO only.

Here’s the revenue side:

Here you see the original first year caseload value and how that value goes down:

1. Down by 20% in a fully functional scenario. 2. Down by 40% in a half functional scenario. 3. Down by 55% in a no administrative support scenario.

I know that the minute you see these value reductions/drops you will say something along the lines of: “You mean to tell me that I will experience a 20% decline in revenue even when I am paying full attention to the caseload?” Yes, I am.

If you fully manage the caseload as you should and you have not cultivated substantially larger gifts from 5-8 top tier donors on your caseload, the “normal” value attrition we see across clients and prospects is 20%. Anything 20% and under is “good” attrition. Now, this point does not address the fact that if you are cultivating your top tier donors, your total caseload value should INCREASE year to year. But that is another subject. What I am trying to do in this document is explore the effects of support or lack of it on revenue.

The argument I am also making here is that if a MGO is expected to do all the in-office work as well as meet with donors, he or she cannot manage the donors as is needed. The net effect of this reality is that donor attrition is substantially higher. We have seen this over and over again – very high attrition for “non-managed” caseloads – a lot lower attrition for those that are properly resourced and managed.

Now, your numbers might not be exactly like this. In fact, they likely will not be. But one thing I know for sure is this: there is a net economic benefit to supporting the MGO with good solid administrative help. If you don’t believe it, just think about it this way: If your MGO is actually out there with good donors and not having to do all that work in the office, you will agree that (a) more relationships will be built, (b) more information will be secured, (c) more offers, proposals and matches to donor interests will be made, and therefore (d) more money will be raised.

Think about this logically. Then have the courage to support your MGO.

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mid-level, major gift, and planned giving programs with a donor-centered philosophy

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