September 23, 2017
 
Proving You Are a Wise Steward of Donations Will Aid Your Nonprofit

By Dyan Reinhold

Dyan Reinhold
With donors asking nonprofits to deliver a solid return on their investments, demonstrating that you are a wise steward of donations to your organization can give you an advantage over those that can’t.

Charity Navigator, one of the most influential ratings services for nonprofits, will help you prove your exceptional stewardship, as organizations with favorable ratings are attractive to donors, and often command the highest level of funding.

Launched in 2002 to help donors make informed giving decisions and allow well-run charities to demonstrate their commitment to proper oversight of donor dollars, Charity Navigator evaluates more than 5,400 charities in the United States (with the aim of 10,000), as well as hundreds of organizations with international operations.

Charity Navigator uses financial data provided in the charity’s information tax return (IRS Form 990) to identify organizations that are fiscally sound, as well as those that are less effective. On its website, Charity Navigator also publishes donation tips, Top-10/Bottom-10 lists of efficient and inefficient organizations, and results of a national annual study that analyzes any statistical differences that may exist in the financial practices of charities located in different metropolitan markets across America.

What Donors Are Looking For

According to advice offered by Charity Navigator, savvy donors will conduct due diligence on an organization. Donors want to know about a charity’s accomplishments, goals, and challenges. They want to understand the charity’s quality and depth of results—and its ability to continue to achieve these results—not just the number of activities or people served. In other words, donors want confidence in the charity's capacity to bring about long-lasting and meaningful change.

Among the types of questions charities should be able to answer persuasively are:

  • What is the charity’s commitment to reporting results?
  • How does the charity demonstrate the demand for its services?
  • Does the charity report its activities?
  • Does the charity report its outputs (immediate results) and outcomes (medium- and longer-term results)?
  • What is the quality of evidence for reported results?
  • Does the charity adjust and improve in light of its results?
Improving Your Ranking

Use this insight into what donors are looking for to improve your Charity Navigator scores and present your organization in the best possible light.

Charity Navigator rates charities in two categories: financial health, and accountability and transparency. The purpose is to clearly demonstrate to donors how efficiently a charity is likely to use donations, how well it has sustained its programs and services over time, and how committed it is to accountability and transparency. The overall score is a measurement of the distance of the component scores in the two dimensions from the theoretically perfect score of 70, rather than simply the sum or average of the financial health score and the accountability and transparency score. The shorter the distance, the higher the score.

Nonprofits looking to improve their scores should focus on strengthening their organizations’ performance in those areas most important to the Charity Navigator rankings. This approach is referred to as the balanced scorecard methodology.

Among the Most Critical and Closely Scrutinized Areas of Performance

Program expenses – Efficient charities are able to devote the bulk of their budget to spending on programs and services – the day-to-day mission that is the reason the organization exists. If you are devoting too much money to non-program expenses—for example, conferences—your rating will suffer.

Administrative expenses – Nonprofits must keep their administrative expenses at a reasonable level, certainly a challenge when also attempting to hire and retain the most qualified people to run the organization. Charity Navigator measures the overall administrative fees as a percentage of each organization's budget, and compares this percentage to benchmarks at peer organizations.

Fundraising efficiency – Efficient charities are able to raise substantial funds without excessive marketing costs. Does this sound like your organization? How much of your budget is devoted to fundraising? Are you paying excessive fees to "for-profit" fundraising organizations? If so, your Charity Navigator scores could suffer because this might indicate potential problems within your organization.

Revenue growth versus program expenses growth – How fast is your nonprofit growing? How much money do you have coming in each year? How much of this inflow are you spending on additional programs and services? High-capacity charities know how to grow their services in proportion to increasing funding. This measure attempts to show whether an organization has the right people, systems, and processes in place to successfully convert new money into expanding their mission.

Organizational capacity – This category measures how successfully a nonprofit has sustained its programs and services over time, and evaluates the organization's financial strength and prospects for continued success. Higher scores are awarded to nonprofits with slow and steady performance.

Working capital ratio – Calculated by dividing an organization's amount of working capital by its total annual expenses, this measure of a charity’s financial strength is meant to show how long the charity could sustain its current programs without new revenue.

Wooing donors – Every donor dollar counts. With steep competition today among nonprofits, differentiating yourself by proving to potential donors that you can deliver a solid return on their charitable investments is vital. By focusing your resources on the areas highlighted in the balanced scorecard methodology you will not only improve your Charity Navigator rating, you’ll also motivate your organization and strengthen its success – two elements of great importance to potential sponsors.

Dyan Reinhold is a principal in the Not-For-Profit & Education Practice at CBIZ Tofias. Call her at 617-761-0553 or email DReinhold@cbiztofias.com.

March 2013

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