Blogging Beyond the Numbers
Charity Navigator is a nonprofit organization that evaluates the performance of 501(c)(3) Public Charities. Each charitable organization reviewed is assigned a star rating from 1 to 4. Obtaining a 4-star rating from Charity Navigator can boost an organization’s ability to secure donations and grants from donors.
The purpose of the star rating is to show donors how efficiently a charity is using their support, how well it is sustaining its programs and services over time, and their level of commitment to being accountable and transparent. Even though Charity Navigator only evaluates organizations with public support greater than $500,000 and revenue greater than $1,000,000, using their performance measures to evaluate any nonprofit can be a great tool to running an organization successfully and efficient.
To determine an organization’s star rating, Charity Navigator evaluates both the Financial Health and the Accountability and Transparency of the organization. The overall star rating is the result of a mathematical equation that takes into account how the organization performed in each of these two categories.
- Charity Navigator looks at 7 different metrics and assigns a maximum of 10 points in each area. Total scores of 60 or more points are granted a 4-star rating, those between 50-60 points are granted 3 stars, 40-50 points get 2 stars, 25-40 points get 1 star, and those below 25 points do not receive any stars.
- It’s important to note that, in assigning scores to an organization, they compare the organization to the performance of similar organizations. For example, food pantries are expected to have lower admin costs than museums. Therefore, while a food pantry would need an admin percentage of 3% or less to score the maximum 10 points, a museum could be as high as 17% admin and still score the maximum 10 points in the management expense category.
- The 7 financial metrics that Charity Navigator looks are at:
- Program expenses as a percentage of total expenses
- Management expenses as a percentage of total expenses
- Fundraising expenses as a percentage of total expenses
- Fundraising efficiency: fundraising expenses divided by total contributions. In other words, how much money the organization spent to raise $1 in contributions.
- Primary revenue growth and
- Program expenses growth: Analyzes revenue and program expense growth over the last 4 years. Growth is a sign that the organization will be able to sustain its programs in future years and thus a good investment for the donor.
- Working capital ratio: Measures how long the organization can sustain its current programs without generating additional revenue. Calculated by dividing working capital by total expenses. Working capital = Current assets – Current liabilities
- In general, financial health can’t be improved overnight. The organization can, however take steps to slowly improve its financial score. Taking measures to improve your organization’s financial score with Charity Navigator is not only a good way of improving the overall star rating in Charity Navigator, but it is also a good way of improving the financial stability and performance of the organization. Keep in mind though that not all nonprofits are equal. How your organization performs in each of these metrics will depend in part by the type of organization and the resources at your disposal.
Accountability and Transparency
- Charity Navigator believes that charities that are accountable and transparent are more likely to act with integrity and learn from their mistakes. It assumes that charities that follow best practices in governance, donor relations, and related areas are less likely to engage in unethical or irresponsible activities and are therefore a better investment for potential donors.
- To rate organizations in this area, Charity Navigator looks at the information available on the 990 as well as on the organization’s website.
- While it could take years to improve the score for financial health, improving your accountability and transparency score can be accomplished fairly easily.
- There are 17 areas of accountability and transparency that Charity Navigator looks at. Each organization starts with a base of 70 points. Points are deducted for each of the metrics that the organization does not have.
- Total scores are rated in the same manner as those for Financial Health with total scores of 60 or more points granted a 4-star rating, those between 50-60 points granted 3 stars, 40-50 points get 2 stars, 25-40 points get 1 star, and those below 25 points do not receive any stars.
- The 17 metrics that organizations are rated on in this area are listed below. Next to each metric is the number of points the organization looses for failing to have this in place.
- Independent board – Majority of members should be independent and there should be at least 5 independent voting board members. (less 15 points)
- Material diversion of assets – looks at the past 2 years (less 7 or 15 points depending on resolution)
- Audited financial statements with an audit oversight committee (less 15 or 7 points depending on the presence of an audit oversight committee)
- Loans to or from related parties (less 4 points)
- Documents board meeting minutes (less 4 points)
- Provided copy of Form 990 to organization’s governing body in advance of filing (less 4 points)
- Conflict of interest policy (less 4 points)
- Whistleblower policy (less 4 points)
- Records retention and destruction policy (less 4 points)
- CEO listed with salary (less 4 points)
- Process for determining CEO compensation (less 4 points)
- Board members and directors are listed and board members, other than staff, are not compensated (less 4 points)
- Board members are listed on the organization’s website. Charity Navigator does not compare this information to the Form 990 since different time periods may apply. (less 4 points)
- Key staff listed on the organization’s website. (less 3 points)
- Audited financial statements are available on the organization’s website. It currently does not differentiate between organizations that received a qualified or an unqualified opinion. (less 4 points)
- Form 990 is available on the organization’s website. If you post the 990 on your website, make sure you are posting a copy of your 990 that does not include confidential information such as the name and addresses of your donors either on Schedule A or Schedule B. (less 3 points)
Overall Star Rating
- The mathematical equation that Charity Navigator uses to compute the overall score and overall star rating is rather complex. It attempts to ensure that an organization must do well in both the Financial Health and the Accountability and Transparency areas in order to have a favorable star rating. For anyone interested, Charity Navigator has a formula calculator on their website where you can input both scores to come up with your overall score. Go to their website www.charitynavigator.org and, under Methodology, click on “How do we calculate the overall score and star rating?”.
- Again, total overall score has a maximum of 70 points. Total scores of 60 or more points are granted a 4-star rating, those between 50-60 points are granted 3 stars, 40-50 points get 2 stars, 25-40 points get 1 star, and those below 25 points do not receive any stars.
- Our recommendation is that every organization should strive for a perfect score in Accountability and Transparency. It is not difficult to have these policies and procedures in place and it will show donors that your organization is using its funds in a responsible, honest manner in accordance with the organization’s mission and the donor’s wishes. Below are links to a few sample policies that can be adapted to the needs of your organization.