Tuesday, August 25, 2009

How Does Charity Navigator Work?

Charity Navigator has long been a gold standard in evaluating the fiscal health and well being of Nonprofits. Now, more than ever, people are determined to make informed decisions about where their charitable dollars will go and whether the charity they are considering will spend their contribution wisely and efficiently. Ken Berger provides a glimpse into how Charity Navigator rates charities. Bunnie

How Does Charity Navigator Work?

by Ken Berger, President and Chief Executive Officer

Charity Navigator (www.charitynavigator.org) is the largest evaluator of charities in the United States. Our team of professional analysts has examined tens of thousands of non-profit financial documents. As a result, we know as much about the true fiscal operations of charities as anyone. We've used this knowledge to develop an unbiased, objective, numbers-based rating system to assess the financial health of over 5,400 of America's best-known mid to large sized charities.

CHARITY NAVIGATOR’S RATING SYSTEM

What Kinds of Charities Do We Rate?

Criteria are based on our goal to help individual donors.

• Tax Status: 501(c)(3) public charities.

• Sources of Revenue: Depend on support from private contributions (at least 33%).

• Type of Programs: All types of programs and Services.

• Length of Operations: At least 4 years.

• Location: All parts of the country.

• Size: America's largest charities.

HOW DO WE RATE CHARITIES?

Charity Navigator's rating system examines two broad areas of a charity's financial health – how it functions day to day as well as how well positioned it is to sustain its programs over time. Each charity is then awarded an overall rating, ranging from zero to four stars. To help donors avoid becoming victims of mailing-list appeals, each charity's commitment to keeping donors' personal information confidential is assessed. The site is easily navigable by charity name, location or type of activity.

It also features, among/other things, the CEO’s salary for each organization we evaluate, opinion pieces by Charity Navigator experts, donation tips, and top-10 and bottom-10 lists which rank financially efficient and inefficient organizations in a number of categories. Charity Navigator accepts no funding from the charities that we evaluate, ensuring that our ratings remain objective. Furthermore, in our commitment to help America's philanthropists of all levels make informed giving decisions, we do not charge our users for this data. Accordingly, Charity Navigator, a nonprofit 501 (c) (3) organization itself, depends on support from individuals, corporations and foundations that believe we provide a much-needed service to America's charitable givers.

The two broad areas of a charity’s financial health mentioned above are their organizational efficiency and their organizational capacity. We use a set of financial ratios or performance categories to rate each of these two areas, and we issue an overall rating that combines the charity's performance in both areas. Our ratings show donors how efficiently we believe a charity will use their financial support today, and to what extent the charities are growing their programs and services over time. We provide these ratings to help donors in the process of making intelligent giving decisions, and so that the philanthropic community can more effectively monitor itself.

At its most general level, our rating system is relatively simple. We base our evaluations on the financial information each charity provides in its informational tax return, or IRS Form 990. We use that information to analyze a charity's financial performance in seven key performance categories, described below. After analyzing those performance categories, we compare the charity's performance with the performances of similar charities. We then assign the charity a converted score ranging from zero to ten in all seven performance categories.

SEVEN PERFOMANCE CATEGORIES MEASURING FINANCIAL HEALTH


  • Program Expenses: Percent of total functional expenses spent on programs and
    services (higher is better).

  • Administration Expenses: Percent of total functional expenses spent on
    administration (lower is better).

  • Fundraising Expenses: Percent of total functional expenses spent on fundraising
    (lower is better).

  • Fundraising Efficiency: Amount a charity spends to raise $1(lower is better).

  • Average Annual Growth of Operating Revenue: Measures growth of grants and contributions, revenue generated from programs and services, and membership fees and dues over 36 months.

  • Average Annual Growth of Programs and Services: Measures growth of program expenses over 36 months.

  • Working Capital Ratio: Determines how long a charity could sustain its level of spending using only its net liquid assets, as reported on its Form 990.

Contact Ken at http://www.charitynavigator.org/

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