Nonprofit ROI: How “Measuring the Good” Can Help Nonprofits Justify Investments

Nonprofits’ impact is often intangible and not easily translated into dollars.

Every MBA school teaches the importance of considering your Return on Investment (ROI) when completing a cost-benefit analysis. If a restaurant hires an additional burger flipper, for example, they can increase the number of burgers sold per hour and then directly compare the value that is added by hiring another person. Alternatively, they can send their existing burger flippers to Advanced Burger Flipper Training™ in order to increase the productivity of extant employees. In terms of ROI, corporations consider the cost of the options, how each results in additional revenue, and which choice represents the soundest financial decision (in theory).

As consumers, we consider ROI in our personal lives as well. Should we buy the name brand product or the generic alternative? Should we buy the 1,000-pack of toilet paper from Costco or grab a 4-pack from the grocery store? Many people spend hours and hours figuring out which vehicle is “best,” considering the initial cost, maintenance cost, liability reports, fuel economy, resale value — the list goes on and on. Of course, frequently after our research, we buy something that looks cool to impress our friends, but at least we try to be rational.

In the nonprofit field, figuring out a return on investment is more difficult. Although some nonprofits have been able to turn a strong ROI into a funding source, most of us do not have the simple formula of income – expenses = profit, where a positive profit means we succeeded. Instead, we must measure the good that was done with the funds spent, justifying why this was a good use of the funds.

On the other hand, the for-profit sector’s obsession with ROI has not always yielded great results. In fact, the sector’s deference towards short-term financial gains above all has resulted in a reckless disregard for the community and the environment. As many of us in the nonprofit field are all too keenly aware of, corporations have historically merely weighed the cost, say, of saving a few million dollars, with the negative publicity and potential lawsuits garnered by polluting a river and giving a community cancer. One might, in fact, question the validity (if not the efficacy) of environmental protections if corporations can merely pay a fine for violating such laws (looking at you, Tesla). But perhaps that is a conversation for another time.

Of course, nonprofits are not usually in the business of weighing community health against the financial gains of their stockholders. In fact, it’s usually the opposite (or some inversion therein). However, it can still be helpful to understand ROI by performing generalized cost-benefit analyses to see if our organizations are utilizing our resources to the best of our abilities.

Here are three areas in which nonprofits might perform cost-benefit analyses:

Area 1: Programming

Most nonprofits provide services, which means that they must understand the personnel requirements that go into programming. To analyze this, a nonprofit needs to determine the appropriate staff-to-client ratio.

Of course, nonprofit leadership probably recognizes that the more attention a client receives, the more likely they are to be successful. However, they also know that staffing costs can be expensive. Essentially, in terms of programming, attending to ROI means getting the most outcome out of each staff member.

But this is not where the analysis ends. After all, using this justification, leadership must determine if one case manager should work with one client, or if one case manager can work with 20 clients. In this decision, we must balance the needs of the clients with the wear and tear on the employee and their ability to sustain healthy performance with their specific workload.

Yet at every point, ROI means we must balance the best outcome for the least cost, including noting any diminishing returns. If, say, our clients are no more successful with a 1:1 ratio than a 5:1 ratio, then it would make no sense to have a 1:1 ratio. Even something as seemingly straight-forward as programming can require a complicated cost-benefit analysis for nonprofits.

Area 2: Training

If your nonprofit provides programming, chances are it also provides training to its employees (we can only hope). And indeed, continued professional development is integral to efficient nonprofit management, including succession planning.

But let’s take a look at a specific example: say you work at a nonprofit involved in trauma-informed care, and a case manager finds an $1,500 Motivational Interviewing course they want to attend. Of course, you know this training could result in better productivity, improving employee satisfaction, and an increase in the staff-to-client ratio. It could also result in helping even more families or having a greater impact on the families we serve.

However, it becomes difficult to quantify the exact value that this specific training would provide. That is, it is difficult to provide a dollar value on increasing your case manager’s effectiveness, especially when the potential negative outcome (for a client) could be homelessness, substance abuse, or death. This is where ROI definitely seems to get a little bit more muddled, so to speak, depending on what you are identifying as your return.

Area 3: Work Culture

In the United States, there is currently a push to move to a four-day work week. In industries where productivity can be (and is) measured, this can be a very mathematical decision. Studies show that a person can be more productive working fewer hours versus working longer hours.

However, in a social service agency when the value is frequently face time with a client, it is harder to justify. Nonprofits might make the argument that a shorter work week is better for the mental health of our staff, helps staff retention, and projects a more positive agency image. Unfortunately, it is very difficult to quantify the value, especially if it makes funders wonder if the agency is wasting valuable resources. Here, not only do you have to identify what the return on investment is, you also have to indicate for whom this ROI exists. If you burn out your employees and they leave the nonprofit sector, you may incur more costs due to turnover and the community itself suffers.

Why ROI and the Nonprofit Sector Find Themselves at Odds

If we focus too hard on measuring outcomes and costs, it might cause a nonprofit to “cherry pick” causes and/or clients.

Take the example of trauma-informed care, for instance. It stands to reason that the people who need the most help will be the most expensive to help. On the other hand, the people who only barely need our help will make us look good on paper — but are we really improving our community? The work involved in helping a person who recently lost their job and then became evicted is relatively simple. The work of helping a person who has never had a job and has been sleeping in an alley for the past 30 years is much more difficult.

If we use ROI to determine who to help, some people will never receive help. This is where the mission must override financial decisions.

ROI means the mission comes first…

The mission of the organization must always be considered in these decisions, especially in terms of how mission and values alignment affect nonprofit culture.

Such analyses regarding ROI and mission might occur in terms of staffing, for example. We might ask ourselves: Should we hire our clients? Or should we require that potential new hires have a graduate degree and years of experience? At the end of the day, we are really asking which strategy — or perhaps a blend of the two — best serves our mission — and therefore offers a positive ROI.

Say our nonprofit’s mission is to help families get out of poverty. One of the ways to achieve that mission is to hire people who for-profit businesses would not hire. This could create a justification for a lack of productivity because we are training people to become employable. In this circumstance, a high turnover of staff would indicate achieving our mission and demonstrate a positive return on investment. Again, our hiring practices should reflect our mission and values.

On the other hand, maybe we spend funding on high quality training, only to find that our staff leave to work for another agency. Aw, we might think, what a waste of funding!

…and the mission is community.

But when we consider our mission of a self-sufficient community, then this expense still supports families in our community, only at another agency. This is where the for-profit world differs distinctly from the nonprofit world. By focusing on building community, the nonprofit world recognizes that such turnover represents not a loss but a readjustment of resources.

This perspectival shift is integral, for example, when working with interns, who often take up valuable resources and rarely provide an immediate return on investment. When we consider the mission, providing a place for interns to learn and grow becomes crucial to the continuation of our organization.

Analyzing ROI in terms of community also brings into question your nonprofit’s procurement policy. Throughout the sector, local preference policies are becoming more common. But if we purchase from the local small business, chances are their prices won’t be comparable to the international chain store.

However, we can justify (to our funders, for example) paying a little extra because it aligns with our values of building strong communities. We can also justify the expense because the international chain store probably won’t sponsor our gala. Supporting our local chamber of commerce and small businesses is always the right thing to do, even if it is difficult to measure the exact return on investment.

More Art Than Science

Admittedly, sometimes this exercise is more art than science. In the few instances when it is a financial decision, ROI can help nonprofit leaders make the soundest financial decisions. But in most cases, it only points us in a direction.

If we consider our options, the costs vs. benefits, and our mission, then we will make the right decision. The most important part of the decision-making is to never go against the mission. Nonprofits exist to fulfill their mission and should never violate that, even if it is to save money. As long as by doing so we don’t go bankrupt and find ourselves unable to fulfill our mission at all, making financially sound choices is crucial.

But sometimes we ignore the math and follow our hearts. I recently spent hours researching options on motorcycles and then ignored it all to purchase a new Harley-Davidson Ultra with the Milwaukee-Eight 114 engine. Following this anti-logic, I am trying to purchase a limousine to transport our clients. Of course, the cost of purchase and operations do not support the decision. But imagine exiting prison and being picked up in a limousine as you start your new life!

Perhaps it’s time for nonprofits to redefine the ROI narrative and partner with the corporate sector. Imagine convincing a limousine company to donate a vehicle for our cause, turning their corporate PR efforts into tangible benefits for our community!

You might also like:

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• A Guide for Private Foundations: Tax Exemption and 990-PF Filing Requirements
• Why is it Hard to Give My Money Away? A Donor’s Perspective
• Nonprofit Grant Proposal Budget Calculations: A Road Map

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About the Author

Darryl Evey

CEO at Family Assistance Program

Darryl Eveyis the CEO of Family Assistance Program. Under his leadership, Family Assistance Program has expanded to include opening the only youth shelters in San Bernardino County, opening multiple transitional housing programs, two youth drop-in centers, a prison reentry program, and an anti-human trafficking program. Each of these programs are run by survivor/leaders who represent the clients they serve. All programs are heavily focused on providing a trauma-informed empowerment approach to helping their clients achieve their own goals.

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