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Using Formulas to Estimate Giving Capacity

If we could accurately estimate the giving capacity of prospects we would be in a better position to determine the amount they will donate to our organizations, and this would help us to make more accurate budget forecasts.

It is generally agreed that it is not possible to accurately determine how much a prospect is capable of giving, but several formulas are available that can help us to estimate giving capacity as closely as possible.

Formulas used by prospect researchers include formulas based on net worth, annual income, stock and options, private company ownership, and prior giving. The formulas are not in themselves sufficient to make estimates, but should be used in combination with information about the prospect’s stage in life, life cycle, and other factors which could affect their ability to donate.

In my search for information that would help me to use the most appropriate formula to estimate a prospect's giving capacity based on information that is available on the prospect, I found that it was necessary to establish the origin of the formulas used so that I can use them appropriately in a Canadian context.

The origin of some of the formulas used is uncertain, but I was able to find information on how some of the formulas originated and how development professionals have used some of them.

Origins of Formulas

Net Worth Estimates Based on Internal Revenue Service Formula

In his article entitled "How much is That Donor in Your Records?" Robert G. Millar III, Director of Development and Research Services at Boston College outlined how statistics based on research data from the Internal Revenue Service on wealthy individuals who earn $600,000 or more can be used to determine net worth.

Millar was able to show how information on estate holdings from various tables could be used to determine the average percentage of assets of the wealthiest individuals and how, using this information, their net worth could be estimated.

The research department of the University of Virginia used Millar's formula for individuals earning $600,000 or more, but modified the formula for individuals earning less than $400,000 after finding that the formula did not apply to individuals earning less than $600,000. The university used the following formula when determining giving capacity for real estate totalling less than $400,000:

Estimated net worth = total real estate holdings x 3
Estimated giving capacity = 3 percent of estimated net worth

Annual Income Formula Based on Donor Statistics

In her presentation to the Association of Fundraising Professionals New York Chapter during Fundraising Day 2003, Melinda Papowitz, Director of Research at Yale University identified statistics compiled by Giving USA in 2002 as possible sources of formulas used in calculating giving capacity based on annual income. Giving USA 2002 research showed that donations from individuals between the years 1999 to 2001 ranged from 1.8 percent to 2.0 percent.

The following annual income formula which is used to determine giving capacity also corresponds to Giving USA statistics:

Giving capacity = 2 percent of annual income

(Includes salary, average bonuses, and other income)

For a capital campaign, 10 percent is used for the ask, which is the same as a 2 percent pledge over a 5-year capital campaign period.

Other Formulas Used

Net Worth

Giving Capacity = 2 to 5 percent of estimated net worth.

Prior Giving Formula

Giving capacity = (2 to 4) ´ average donation ´ 5 years

The figures 2 to 4 represent the prospect's level of interest, with 2 representing low interest and 4 representing high interest. The amount could represent a pledge over a five-year period or a one-year donation. For example:

$5,000 (average gift) ´ 2 (representing a low donor interest) = a pledge of $10,000 yearly over a 5-year period.

A single $50,000 donation could be made instead of a 5-year pledge.

Giving Capacity Based on Assets

Giving capacity = 5 percent of liquid assets for those whose primary residence constitutes a great portion of overall net worth. Another source lists giving capacity as 0.5 percent to 1.5 percent of liquid assets.

Giving capacity = 5 percent of total known assets, which include stock holdings, real estate, and annual income over five years.

Additional Formulas

Richard L. Edwards, author of Building a strong foundation: fundraising for nonprofits quoted the following formulas for estimating net worth and giving capacity:

Estimated Net Worth =

§ Total value of stock ¸ 0.385

§ Total market value of property ¸ 0.246

§ Value of company where the person is the sole owner ´ 2

§ Salary or estimated salary ´ 10

Giving Capacity = Estimated Net Worth ´ .005 and ´ .02

Other formulas used include the following formulas recommended by Robert G. Millar III for estimating giving capacity for donations over a five-year period:

Giving capacity =

20 ´ level of consistent annual giving, or
10 percent of annual income (2 percent per year over a five year period), or

10 percent of stock and option holdings worth $1 million or more, or
5 to 9 percent of stock and option holdings worth $500,000 to $999,999, or
1 to 4 percent of stock and option holdings worth $1 to $499,999

Giving Capacity based on Private Company Ownership:

Net worth = 25 to 50 percent of the value of the prospect's holdings in a company, or
Giving capacity = 1.5 to 5 percent of net worth

The actual percentage used would depend on the amount of equipment and property the company owns

Multiple Formulas

A combination of net worth formulas such as estimated net worth, stock holdings and prior giving formulas can be used to determine capacity to give. For example:

For an estimated net worth of $5M, giving capacity at 2 to 5 percent = 100,000 to 250,000.
Stock holdings of $500,000 ´ 5 per cent (in the 5 to 9 percent range) = $25,000.
Annual gift = $2,000 ´ 4 (high level of interest) ´ 5 years = $40,000

A giving capacity range can be determined based on the results obtained. For the calculations shown above, the high estimate would be $100,000 to 250,000 and the low estimate would be $25,000.

A final determination of the gift range is made after taking into account factors such as life stages and life cycle.

Implications

The variety of formulas used shows how difficult it would be to estimate giving capacity with any accuracy. It is obvious from the information presented on the possible origin of some of the formulas that some formulas are not likely to remain constant, but could change when new information becomes available about wealth, giving, and other factors that are used in calculating giving capacity.

It is also evident that formulas that are used in calculating giving capacity in the USA may have to be modified in order for them to yield accurate estimates in a Canadian context.

For information about this article, please contact Koreen Simon, Fund Development Consultant, Neerok Consulting at neerokconsulting@netzero.com. Koreen Simon holds a postgraduate certificate in Fundraising and Volunteer Management and manages a fundraising consulting service which helps organizations and consultants with their research, proposal writing, and strategy development. For information about this service, visit http://www.neerokconsulting.netfirms.com.

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