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The team from Charity Navigator, the nation's largest independent charity evaluator and leading donor advocate, shares their thoughts on emerging nonprofit-sector issues and offers tips to better inform your intelligent giving decisions.

Friday, February 16, 2018

Taking a Closer Look at Charity Navigator's Ratings: Financial Health

Charity Navigator offers more than 9,000 two-dimensional charity ratings. Our ratings take into account a charity’s financial health, as well as their accountability and transparency. 

Today we’re going to be taking a closer look at what we factor into a charity’s financial health rating. Please remember this only makes up half of an organization’s evaluation and you should take the full rating into account before making a giving decision.

Our financial ratings are based on seven metrics. The first four look at a charity’s financial efficiency and performance. The last three look at an organization’s financial capacity. We will provide a quick look at each here. You can find more in-depth definitions and information on our website. 

Metric One: Program Expense Percentage

Charities exist to provide programs and services. They fulfill the expectations of givers when they allocate most of their budgets towards their charitable missions. Charities that consistently underspend on their programs and services do not have as strong an impact on their charitable missions.

Metric Two: Administrative Expense Percentage

As with successful organizations in any sector, effective charities must recruit, develop, and retain talented people. At the same time, they should ensure that these administrative expenses remain reasonable and in line with the organization's total functional expenses.

Metric Three: Fundraising Expense Percentage

Givers support charities for their programs and services, not for their ability to raise money. Charities should ensure that fundraising expenses stay in line with the charity's total functional expenses. 

Metric Four: Fundraising Efficiency

Financially effective charities must in part be efficient fundraisers, spending less to raise more. We calculate a charity's fundraising efficiency by determining how much it spends to generate $1 in charitable contributions. 

Metric Five: Program Expenses Growth

Charities that spend more year over year on their programs and services continue to have a greater impact on their charitable missions. Organizations that demonstrate consistent annual growth in program expenses are able to outpace inflation and thus sustain their programs year to year. These organizations also supply givers with greater confidence by maintaining broad public support for their programs.

Metric Six: Working Capital Ratio

Charities depend upon their reserves of liquid assets to survive downward economic trends and sustain their existing programs and services. If a charity has insufficient working capital, then it faces the difficult choice of eliminating programs or staff, amassing debts and liabilities, or dissolving. On the other hand, when giving flows, those charities that build working capital develop a greater capability for expanding and improving their programs.

Metric Seven: Liabilities to Assets Ratio

Charities must be mindful of their management of their total liabilities in relation to their total assets. This ratio is an indicator of an organization’s solvency and or long term sustainability. It can signal potential issues within an organization, and additionally, it displays how well the charity is managing this balance in comparison to organizations in the same cause area. This metric helps donors understand if their donations are being used to service debt rather than servicing the charitable mission.

You can find more information about our rating methodology at www.charitynavigator.org.

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