Maintaining the financial vitality of a charity is essential to delivering high-quality programming and services. A combination of effective fundraising, solicitation of government grants, and program revenue drives stability. However, it also requires an expense management policy that ensures too much funding does not go to administrative and other expenses. This makes telling the organization’s story in multiple ways through words, imagery, and numbers important. It also means that special attention needs to be paid to services like Charity Navigator and the criteria used to rate organizations. This includes accountability & finance, leadership & adaptability, culture & community, and impact & results. WhippleWood CPAs have provided a summary of the key points below to help clients, prospects, and others.
Rating System Overview
- Accountability & Finance – This information is used to evaluate governance practices and financial health to identify transparent, efficient, and sustainable charities. Using information disclosed on IRS Form 990 and other sources, this rating provides information on how organizations operate and how donations are being received. Key metrics evaluated include financial statement audits, board compensation, loans to related parties, whistleblower policies, CEO salary, and more. Financial metrics, including the program expense and fundraising expense ratios, are examined.
- Leadership & Adaptability—This section evaluates leadership capacity, strategic development, and the ability to adapt to change. Those with a focused mission, clear strategic plan, and capable leadership are more likely to adapt to changes. Three metrics are evaluated, including strategy, leadership, and adaptability. Criteria evaluated include the mission statement, vision, investment in leadership, and external focus on mobilizing the mission. This information is gathered through information provided on the site.
- Culture & Community – This section evaluates a charity’s overall culture and the connection to the individuals and communities served. Organizations that listen to constituents and leverage collected feedback will likely build and sustain a diverse, inclusive, and equitable workplace. Engagement is determined by information provided by the charity in the How We Listen and Equity Strategies section of the organization’s profile.
- Impact & Results – This section evaluates the direct impact of programming relative to the costs needed to run them. Impact is determined by publicly available information about programming and how it has affected people’s lives, ability to meet mission-driven outcomes, and cost benchmarking. The programmatic impact is evaluated differently by the type of charity and constituents served. For example, financial counseling programs would be evaluated by the increases in the FICO scores of participants.
Donor Evaluation Guidance
Charity Navigator does not provide a rating score for organizations without an Impact & Results and/or an Accountability & Finance score. The absence of this information does not necessarily mean donors should not consider these charities. To assist donors in evaluating a charity, Charity Navigator has provided guidance on critical areas to review, including financial health. The needed information can be found on the charity’s IRS Form 990.
- Program Expenses – Most charities spend at least 70% of expenses directly on programming. This means an organization should not spend more than 30% of total expenses on administration, fundraising, etc.
- Types of Support—To understand the types of support an organization receives, simply look at the Statement of Revenue. The details will indicate what type of support is most heavily relied upon. This may include membership dues, individual donations/contributions, fundraising, program service revenue, and more. It is ideal for an organization to have multiple sources of revenue because if one source declines, it can draw from other sources.
- Executive Pay—For most organizations, the average CEO compensation is in the low to mid-six figures. To determine executive pay, search for information on the Compensation of Officers, Directors, etc. All organizations must report on Form 990 the CEO’s pay and any current officers making over $100,000 annually. While high executive pay can be a turn-off for many potential donors, it is important to consider the location, size of the organization, and work performed.
- Professional Fundraisers – Another critical area to evaluate is whether an organization uses professional fundraisers. To determine this, look at Form 990, Part 1, Line 16. This will provide a breakdown of costs and is where such expenses would be listed. Relying on these professionals to generate revenue is not necessarily a bad sign. However, if the charity spends a lot on outside fundraising with little going towards programming, it may be a red flag.
Contact Us
Donations and contributions are an essential part of fundraising for many organizations. For this reason, it is important to become familiar with the rating criteria used by Charity Navigator and individual donors. If you have questions about the information outlined above or need assistance with a tax or accounting issue, WhippleWood CPAs can help. For additional information, call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.