When comparing nonprofits, it is important to avoid the trap of only looking at an organization’s overhead. The “starvation cycle”, in which organizations spend as little as possible on overhead, can damage the stability and growth of a nonprofit. On the other hand, charities that do not spend a majority of their expenses on program are less effective at fulfilling their missions. We believe that program expense percentage is a vital indicator of financial health for a charity, as it shows that an organization is spending donor dollars on its mission. We use it as one of our seven metrics for evaluating Financial Health.
So what is program expense percentage? It is simply the ratio of money spent by a charity on mission-related programs and services compared to the amount of money the charity spent overall in a fiscal year. In our scoring system, a charity does not need to spend 100% on programs to get a perfect score on this metric; generally, if a charity spends 85% or more on program, it receives full credit for the metric. If a charity spends less than 50% on programs, it receives a score of 0 for the metric. Anything in between is prorated to a score between 0 and 10.
We currently only rate larger, established organizations, so our scoring ratios don’t necessarily translate to unrated organizations. For example, organizations just starting out tend to have lower program expense percentages as they make investments into their future infrastructure, and this is not a bad thing. If you are concerned about an organization having a lower program expense percentage in any one year, the simplest solution is to reach out and ask about it!
For more information about Program Expense Percentage, see our Financial Health Methodology. For more on scoring this metric, check out our Ratings Tables.