Last week we reported on the Ford Foundation’s $1 billion, five-year, Build program’s ongoing investment in the long-term capacity and sustainability of up to 300 social justice nonprofits. The Ford Foundation recognized that the popular donor trend of restricting funding to specific programs without accounting for infrastructure expenses was leading to a “nonprofit starvation cycle”, where charities cease to function because they can’t pay for overhead costs, such as administrative employees, computers and electric bills.
The Murky Past
However, the Ford Foundation’s generous donation is only a beginning. Most smaller nonprofits are still struggling to survive in this new restricted funding environment. In the past, nonprofit organizations have presented a deliberately cloudy picture of the revenue and expense drivers needed to deliver their programs leading to a gap between the amount of funds that are raised for a program and what it actually costs to perform the work. The resulting structural deficit can drain resources from an organization and ultimately collapse the nonprofit.
Now more than ever, nonprofits must be able to truthfully report the revenue-to-program delivery chain, as they walk a tightrope to justify overhead expenditures as an integral component of mission fulfillment. The nonprofit community must strive to be more accountable and transparent to the donor community by providing accurate financial reports and other supporting information to reflect the true costs of nonprofit operations.
The Present Reality
Many nonprofits boast of the small percentage of dollars that go to administrative and fundraising expenses, particularly in web pie charts and fundraising pitches. Unfortunately, such claims inadvertently play into the nonprofit starvation cycle, as they reinforce underinvestment in critical programs because the true costs of delivering services are not explained. Quite to the contrary, Ann Goggins and Dan Howard in the Stanford Innovation Review state:
“Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead— are more likely to succeed than those that do not…The next wave of nonprofit effectiveness will be to educate funders on the real cost of results using a blend of quantitative measures and qualitative narratives. Funders need to understand the truth if they are to change their behavior
The watchdog agency Charity Navigator was founded in 2001 to evaluate nonprofit effectiveness, much like a nonprofit Consumer Reports. It has since become the largest and most-used evaluator of charities in the United States.
Charity Navigator’s rating system examines two broad areas of nonprofit performance, Financial Health and Accountability and Transparency. Ratings demonstrate to donors:
- How efficiently a nonprofit will use their contribution.
- How well it has funded its programs and services.
- And its commitment to governance, best practices and transparency.
Financial HealthCharity Navigator’s evaluations are based on the financial information that each charity provides in its informational tax return, the IRS Form 990. With that information, they analyze each charity’s financial performance in seven key areas, which assess its financial efficiency and capacity, in relation to the charity’s cause area. Their final score of ‘Financial Health’ comes from combining a charity’s scores on a zero to ten scale for each of the seven performance metrics. Their performance metrics consider the true cost of delivering programs while highlighting the efficient and sustainable development of necessary administrative programs.
Accountability & Transparency:Charity Navigator uses two sources to evaluate an organization’s Accountability & Transparency: information provided by an organization on their Form 990 and information collected from a review of the charity’s website. They use that information to score the organization on seventeen different metrics, which assess whether the charity follows best practices of governance and ethics, and whether the charity makes it easy for donors to find critical information about the organization. They then assign a rating for the organization’s overall Accountability & Transparency.
Donors who use Charity Navigator’s rating system are more likely to come away with a realistic view of a nonprofit’s ability to both sustain itself and deliver mission outcomes.
In the world of nonprofit fundraising, there is no measure more valuable or objective than that of a 4-star Charity Navigator rating.