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/

Conducting Due Diligence in Your Executive Director Job Search

by Bunnie Riedel, Host

There is no doubt that the competition for jobs is fierce. For some, just having a job is enough. But if you are someone who is Executive Director material, or who wants to be an Executive Director, it may be tempting to take a position with a Nonprofit organization without conducting necessary “due diligence.”

What is “due diligence?”

Due diligence is finding out as much about the organization as you can, especially the financial health and legal status of the organization. If you are under consideration for an Executive Director position remember, if you get the job, you will be the chief officer of the organization and you will be responsible for the organization through good times and bad.

If you have been called for an interview and before you say “yes” to the position, there are certain things you should do. My first recommendation is that you research the Nonprofit on sites like Guidestar or Charity Navigator. Guidestar provides IRS form 990 (the Nonprofit tax return). With the 990 you can see income and expenses, how much Board Members are paid (if anything), how much the Executive Director is paid, how much is spent on program and often what kinds of programs the Nonprofit is conducting. Charity Navigator provides a breakdown of program v. administrative expenses, how much is spent on fundraising and a rating of the Nonprofit (according to Charity Navigator). My caution here is that both sites’ records are typically two to three years behind and in the Nonprofit management world two to three years can be an eternity.

Next, I would Google the organizational name. What press can you find about the organization? Is it good? Is it bad? Is there very little? If you know the sitting or previous Executive Director’s name or Board member names; Google them. You can learn a lot about an organization by searching the internet.

Before the interview, ask the Board for the following:

• A copy of the bylaws
• Minutes of Board meetings (if they aren’t posted on the organization’s website)
• Three years of audited financial statements
• Any literature or brochures or newsletters or journals the organization prints
• An organizational chart (if they have one)

The bylaws can tell you a lot. How many Board members are there? What are their terms of service? How are Board members selected? How are Board members removed? Are the expectations of Board members spelled out in the bylaws?

Just as bylaws can provide a lot of information, so too can minutes of meetings. While minutes really are only supposed to contain action items and how they were handled, many organizational minutes will contain whole conversations. You can frequently gauge how Board members behave and interact with one another or the previous Executive Director from the minutes.

I have had organizations resistant to handing over three years of audited financials, which in my opinion is crazy because financial statements are a matter of public record for Nonprofits. If they don’t have audited statements, that will tell you something. Look at the statements with an objective eye, if you have a friend who is a CPA, ask your friend to look them over. Certainly pay attention to red flags, such as negatives noted in the management letter, but also consider that Nonprofits, like any other industry have good years and bad years. If the financials aren’t that great, the question you need to ask yourself is “Can I work with this?” Maybe you are the wunderkind who can turn the organization around. In my opinion, bad financials are not a deal breaker, the deal breaker is the conversation you have with the Board about their approach to turning things around. If it is sensible and doable, fine; if it sounds wacky…it probably is.

The literature will help you learn more about the organization’s programs and an organizational chart will help clarify the roles of the various players in the organization and may even reveal information that is not readily apparent (for instance, you may discover a field office nobody has mentioned before).

One of the critical questions you will want to ask during the interview is if there is any pending legal action against the organization. Organizations frequently face the prospect of lawsuits, so legal action (in my humble opinion) is also not a deal breaker but you must be aware of any actions so you can make an informed decision about accepting the position. Is the action going to be a huge distraction to you as you begin your new position? And if so, are you willing to deal with it?

In asking for this information you will learn a great deal about the organization. Is it transparent or is the Board trying to hide something? Being fully informed about the organization is important to your career decision; you want to make sure you give yourself the best possible chance for success, even if that means you might have to politely remove yourself from consideration.

By the way, I would love to have comments on your experience in searching for an Executive Director position, please make sure that all comments provide anonymity to the organization you may be commenting about. And if there's anything I left out of this list, let me know that too!