This article first appeared on The Guardian’s Voluntary Sector Network. 

Do you play the National Lottery? Why ever not, given that you could win a few million pounds which I dare say you’d find pretty handy? Probably because the odds are terrible: the micro-chance of winning is too unlikely to justify the ‘cost of entry’. Most of us know that because we’ve automatically done the calculation of risk and return.

Charities do well to make that calculation when raising funds: weigh up a particular funding stream’s costs of entry, the size of the prize it offers and the odds, before committing time.

Funders who solicit applications or proposals (which include commissioners) vary hugely in the time required by their application process – the ‘cost of entry’. They also vary hugely in the odds they offer applicants – that is, the proportion of applicants they eventually support.

Most donors receive far more applications than they are able to fund.NatWest’s CommunityForce programme recently received 17 times as many applications as it was able to fund, and ended up rejecting 93% of charities. It also had a potentially high ‘cost of entry’ because winners were chosen through a public poll so charities have to persuade lots of individuals to vote. After all that, the prize was a £6,000 restricted grant, so for many fundraiser’s the cost of entry calculation wouldn’t look good to any charity that wasn’t confident of winning a public poll.

For NatWest’s CommunityForce, the odds, prize and entry cost are knowable in advance, just like they are for the National Lottery: the entry mechanism, grants offered and eventual rejection rate were virtually identical this year to last year.

Sometimes it’s not possible to estimate the probabilities in advance because the donor is new. This may have been the problem with the Social Action Fund, which is Cabinet Office money disbursed by the Social Investment Business. In its first round, it received 700 applicationsof which it supported just 16, only one in 44, giving it a scorching 98% failure rate.

There are many stories – some rather apocryphal – of donors funding none of their numerous eligible applications. The lesson here is “RTFM”, as they say in technology – ‘Read The Manual’. Charities applying when they are obviously outside the guidelines is like buying a lottery ticket but failing to choose any numbers.

These discouraging odds and high entry costs surely explain why the costs of fundraising are so high for charities: according to Matthew Bishop and Michael Green‘s book Philanthrocapitalism, raising £100 typically costs a business around £7 but can cost charities about £20-40. Those costs are what economists call a ‘negative externality’: a problem dumped onto somebody else. They don’t show up in the donor’s own accounts, but are real nonetheless.

The (obvious) tragedy is that each unsuccessful application represents time and/or money which could have been spent productively on solving social and environmental problems. It’s an opportunity cost: the charity forewent the opportunity to do something good. And who bears that opportunity cost? The poor who don’t get served, the school-children or isolated elderly who don’t get supported, and ultimately all of us because our society doesn’t get fixed.

Some donors manage this wastage well. BBC Children in Need currently rejects three charities for each one it supports (pretty mild against the numbers above). Its strategy director Sheila-Jane Malley says: “We’re painfully aware that every application which doesn’t get through was work for somebody. We’ve begun to look systematically at how we can prevent as much of that work as possible.” It’s clarifying its guidelines precisely to prevent inappropriate applicants, aiming for just one rejection per successful applicant. The Community Foundation of Tyne & Wear and Northumberland has even fewer, rejecting just 42% of applicants.

Charities can manage it too, to some extent. Where possible, look at the odds, the costs and the prize before setting out, and actively manage the risk/return in the portfolio of funding opportunities you pursue. If the odds and prize are low, then enter ‘cheaply’: limit the time commitment by recycling other material, for example. And if they’re too low to warrant the effort, don’t come out to play at all. Money is worth having, but not at any price.