Charity Navigator is a preeminent non-profit watchdog organization well-known for its consistent and easily understood ratings. With the impending rollout of Charity Navigator 3.0, the organization aims to set the bar even higher by adding new criteria to their formulas.
Charity Navigator focuses on the heavyweights of US-based philanthropy. The charities they evaluate must receive at least $500,000 from the public annually, and their total annual revenue must be over $1 million. They must be public institutions that are tax-exempt and file a Form 990, from which Charity Navigator gathers significant information.
Currently, Charity Navigator uses two primary criteria to generate their ratings: financial health, and accountability and transparency.
Financial health is evaluated based on financial efficiency and capacity. Measures of financial efficiency judge a charity’s management of expenses throughout the year. These measure include fundraising efficiency, or the cost of generating $1 in donations, as well as percentages of total functional expenses spent on programs, administration, and fundraising. Expected percentages vary based on the type of charity. For example, museums are expected to spend more on overhead expenses and less on programs than most non-profits.
Meanwhile, financial capacity is a measure of the charity’s ability to maintain its work even when faced with difficult times. Indicators of strong financial capacity include consistent growth in revenue and programs, and a high working capital ratio. Growth of both revenue and programs is necessary for a charity to effect long-term, systematic change. Consistent development in both areas also instills confidence in givers by sustaining public support for charities’ work.
Charity Navigator calculates growth in revenue and program expenses using data from the four most recent fiscal years. Working capital ratio refers to the length of time a charity could survive financially in the absence of new revenue. This is a reflection of the charity’s preparedness for downward economic trends.
The second primary criterion currently used by Charity Navigator is accountability and transparency. Accountability refers to an agency’s willingness to explain its actions, especially financial ones, to its stakeholders. Meanwhile, transparency refers to an agency’s willingness to ensure the availability of critical data concerning the organization. Charity Navigator gains information for this criterion from two sources: the charity’s Form 990 and their website.
Charity Navigator is in the process of creating a third criterion: results reporting. This new step is meant to emphasize the need for results-driven work. The additional facet of evaluation would focus primarily on “the way charities come to know, use and share their results with stakeholders including donors.”
Specifically, Charity Navigator aspires to examine five elements of results reporting: consistency of spending with stated mission, reasonability of charities’ goals and their intent to measure their progress, validation from outside organizations, feedback from beneficiaries, and regularly published evaluation reports. By adding these criteria to their formula, Charity Navigator aims to encourage charities to demonstrate their efficacy by collecting more data and making that data readily available to the public.
To ensure fairness and consistency, Charity Navigator will not use this data in their evaluations until the necessary information has been gathered for every charity currently in their databases. Given crucial funding and other resources, Charity Navigator expects this effort to be completed in 2016.
– Katie Fullerton
Sources: Non-Profit Quarterly, Charity Navigator