Charity Navigator

06 Apr 2017

Charity Navigator (CN) is non-profit organization that evaluates charities in America. The CN team assesses charities based on their financial and non-financial performance as well as their transparency with sharing its information to the public. Its goal is to provide donors with vital information so they can make informed decisions when making donations to these charities. It also benefits the non-profit sector as the registered charities can improve or enhance current programs and services provided to the general public, based on the CN evaluation (“Overview”).

Many non-profit organizations are trying to find ways to maximize their CN rating. In analyzing how these organizations are rated, non-profit charities can see what items they are missing or should place a greater focus on, in order to earn higher ratings.

Analyzing Financial Performance and How to Increase a Charity’s Score

In assessing a non-profit’s financial well-being, CN uses information from the non-profit’s IRS Form 990 to calculate its financial efficiency and capacity scores. Metrics of efficiency include program expense percentage, administrative expense percentage, fundraising expense percentage, and fundraising efficiency. CN also looks into any allocation adjustments in providing an efficiency rating. Metrics of capacity include growth in program expenses, working capital ratio, and liabilities to assets ratio. As of June 2016, CN uses a 3-year averaging technique to measure long-term financial performance and calculate these metrics (“How Do We Rate Charities’ Financial Health?”).

The following tips should help charities increase their efficiency rating:

  1. Do not underspend on programs and services
  2. Confirm administration and fundraising expenses appear reasonable and remain in-line with total functional expenses
  3. Spend less to raise more – CN analyzes the relationship between fundraising expenses and contributions. On average, how much does it cost to raise $1 in contributions?
  4. Clearly indicate on the annual return the use of costs, so donors can see how their contributions are utilized within the charity

The following tips should help charities increase their capacity rating:

  1. Increase program spending from year-to-year for consistent annual growth
  2. Focus on cash management to increase cash flow and improve working capital
  3. Manage liabilities efficiently in relation to assets to give donors confidence that their contributions are not being used to pay off debts – having a debt ratio of 0.5 or lower is a good signal to donors

For a more detailed breakout of how these individual metrics are calculated, charities and donors can visit this website.

Analyzing and Improving an Organization’s Accountability and Transparency Score

CN also measures non-financial performance when rating non-profit charities. CN refers to non-financial performance as the accountability and transparency component and utilizes information obtained from the charity’s IRS Form 990 to analyze the charity’s governance and operations. CN considers 12 items as outlined within the charity’s IRS Form 990 and for each missing item, points are deducted from the overall accountability and transparency score. In order to maximize this score, it is critical that the non-profit ensures the following items are in place and properly disclosed on the IRS Form 990:

  1. There is an independent Board that has at least 5 members who are a voting majority
  2. There is no material diversion of assets
  3. The audited financials were prepared by an independent accountant WITH an audit oversight committee
  4. No loans were provided to or received from third parties
  5. Board meeting minutes are documented and maintained by the charity
  6. The charity provides a copy of the IRS Form 990 to the organization’s governing body before filing the return
  7. A conflict of interest policy exists
  8. A whistleblower policy exists
  9. A retention and destruction policy exists in regards to maintaining organizational documents
  10. The CEO’s name and his/her compensation is listed
  11. A consistent process for determining the CEO’s annual compensation is provided
  12. All board members’ names are listed, whether or not they are compensated

CN also reviews the charity’s website when assessing its accountability and transparency score. CN ensures that the following aspects are easy to find on the charity’s website: all key staff and board members are listed, current and prior year audited financial statements are published, the most recent IRS Form 990 is published, and its privacy policy explicitly states it will not share or sell donors’ personal information with anyone (“How Do We Rate Charities’ Accountability and Transparency?”). For organization’s seeking to maximize its score, it would be recommended to focus on the aforementioned areas. Charities are encouraged to provide all of this related information to their IRS Form 990 preparers, while also maintaining a navigable and thorough website.

Donor Confidence

Collectively, the financial performance metrics as well as the non-financial accountability and transparency metrics are the basis for rating various charities. Charities providing as much information as possible will help provide comfort to current and potential donors, while also helping to shed light on its financial stability and operations. After all, donors want to ensure that the charities they support are able to meet their financial obligations, and efficiently maintain its programs and services in order to maximize its impact on the community.

Sean Wilkinson, CPA
Manager
Matthew Hecker
Staff Accountant