March 15, 2017
Just like in business, competition in the nonprofit sector is evolving each year. These days, individuals are continuously solicited over social media to volunteer and support various charities. Would-be donors are encouraged by the media and watchdog groups to be more conscious about how the money they give is ultimately used. Charity Navigator, Great Nonprofits and other websites have been gaining popularity among potential donors, who rely on these sources for accurate information to inform their giving decisions.
Often, these sites draw significantly from the charity’s Form 990 and other public sources, and they do not provide the rated organization an opportunity to weigh in on the final scoring. If you are part of your organization’s leadership, you already know that this rating can directly affect the financial viability of your organization by way of donations. However, what can you do to improve it? There are some key areas charities can control (and others they cannot) making a robust strategy necessary for any organization that wants to manage its own rating.
To illustrate, let us examine a well-known website, Charity Navigator. It is important to understand that Charity Navigator’s scoring only applies to contribution-based 501(c)(3) charities with revenue over $1M for two consecutive years. Below are some of the broad factors that Charity Navigator assesses.
Rating Your Financial Health
Charity Navigator rates an organization’s financial health by analyzing seven financial performance metrics primarily from data included in the charity’s Form 990, including programmatic expense percentage, administrative expense percentage, fundraising expense percentage, fundraising efficiency, programmatic expense growth, working capital ratio, and liabilities to assets ratio.
Organizational governance is an area where many charities have focused with the intention of improving their Charity Navigator rating. It is widely considered a best practice for any organization to establish clear governance policies, continuously monitor proper implementation of these policies and ensure overall accountability of the governing board. Furthermore, governance policies have a dedicated section in the Form 990, which Charity Navigator uses to calculate an organization’s Accountability and Transparency score (as discussed below). While you may have limited control over programmatic or overhead expenses, your organization can implement good governance policies to improve its Charity Navigator rating, with the added benefit of giving leadership peace of mind that the organization is using governance “best practices”.
The Role of Your Website
More to Come
In addition to rating “the financial health, accountability and transparency of charities”, Charity Navigator’s website notes that it is expanding its ratings system with a multi-phase project to add Results Reporting. Click here for more information about Charity Navigator’s Results Reporting metrics.
Developing a Strategy to Manage Your Rating
In addition to ratings from Charity Navigator and others, a charity can manage its reputation and drive donations through other tactical activities, including public relations, media campaigns and active participation in the community. Developing a strategy that takes into account your Form 990, the content on your website and other planned activities will set the right course for achieving (and maintaining) your organization’s desired rating and bringing in donations.
The Form 990 is critical, so understanding what it says about your organization is key. Consult a nonprofit tax professional who can help you understand how the Form 990 information affects your rating, provide suggestions to improve it, and assist you in explaining this information to your board and donors. For more information on the Form 990 and strategies for managing your charity’s rating, contact Dick Locastro, CPA, JD, Nonprofit Tax Partner at 301-951-9090 or email@example.com.
Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax