Charity Navigator Updates Rating System

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By David Firester

Charity Navigator has developed a reputation as one of the go-to watchdogs of the nonprofit sector.

Recently, however they announced several key changes to its rating system. While Charity Navigator updates rating system uses two main metrics to evaluate a nonprofit based on performance—financial health and accountability or transparency—the company made changes to only one side of this equation…though they broke those changes down into several parts.

Five of the metrics—program expenses, administration expenses, fundraising expenses, fundraising efficiency, and working capital ratio—were tweaked to include an average of three consecutive years rather than one previous year. This is fairer for organizations who may have had an off year, or who invested heavily in growth or expansion in one year but showed steady conservative expenditures in most years.

The sixth metric, Primary Revenue Growth, which measures income growth based on charity work, was removed from consideration in Charity Navigator’s rating system. According to their reasoning, the watchdog group doesn’t believe that metric adequately or honestly represented the financial health of a given organization.

Elie Hirschfeld, a philanthropist I recently spoke to noted that, “One example of this: a grant may be bestowed one year, but paid out in smaller amounts over a given number of years. This could look like a decrease in funding on paper when it’s actually the same funds being dispersed incrementally.”

Replacing this metric was a newbie, called the Liabilities to Assets Ratio. This metric, based on the most recent fiscal year, is meant to illustrate and consider “excessive” debt. While a company may have a lot coming in, if they have a lot of debt, this is generally an unsustainable model. Charities who depend on this model for funding might not be as safe a bet as those who trend toward more income and less debt.

The final metric, Program Expense Growth, measures the growth of expenses incurred because of the work done by the organization. In other words, how much does it cost to bring in this amount of income? This is a very telling metric with regard to financial health, as breaking even each month might work for a while, but it puts any organization in a precarious position.

Nonprofits don’t “make a profit” but that doesn’t mean they should make a habit of barely covering the bills either. These new metrics may not make for the most exciting reading, but they present an opportunity for many organizations to get rated and show an improved rating. Bragging rights are rarely bad for business – even those in the not-for-profit world.

About the Author: David Firester is an active philanthropist – and professor.