Rose Report: Issue 28
Is Your Financial Report Card an Asset to Your Nonprofit?
Many charities raise a high percentage of their budget through personal and corporate donations. However, following recent scandals about irresponsible spending and wasteful nonprofits, donors are becoming more cautious. A good cause is no longer enough to warrant a donation. Supporters want to know they are contributing to an ethical—and financially accountable—philanthropy.
Donors often research nonprofits before deciding where to spend their money. Several organizations analyze charities and serve as a reference point for these potential supporters. And many of these ratings focus on nonprofit finances. We’ve included information about Charity Navigator and Charity Watch, two of the most well-known website resources, in addition to how a nonprofit can improve financial health, leading to higher ratings, more donors and more great nonprofit programs.
Charity Navigator & Charity Watch
Charity Navigator rates nonprofits based on two main performance areas: financial health and accountability & transparency. Financial health includes four areas dedicated to analyzing efficiency. These include program expense, administrative expense and fundraising expense percentages, along with fundraising efficiency. The remaining financial metrics evaluate financial capacity, including program expense growth, working capital ratio and liabilities to assets ratio. Charity Navigator uses information from all analyzed areas to give charities a rating, ranging from zero to four stars.
Charity Watch evaluates organizations granted tax-exempt status under section 501(c) (3) of the Internal Revenue Code and that file a Form 990. Charity Watch’s evaluation process analyzes audited financial statements, tax forms, annual reports, state filings and more. Its analysts use this information to report on the percentage of total charity expenses spent on programs versus overhead. It also examines how much it costs to raise $100. Charity Watch assigns each charity a rating from A+ to F. This “report card” reflects the nonprofit’s financial efficiency.
Are You Asking the Right Questions?
Nonprofit executives often focus on overarching financial performance, but neglect key performance indicators—ones that can impact their charity ratings. While they know it’s important that a majority of expenses are geared toward programs as opposed to administrative costs, the way these expenses are classified is just as important. This includes asking questions like: Are fundraising percentages accurately recorded?; Are expenses classified properly?; What about allocation methodology—is it being used, and if so, is it being used correctly?; Does it make sense?; Is it reasonable?
Four-Star Answers
At RFS, we ask these questions and more. We offer nonprofits a tailored, cost-effective, team-based approach to accounting.
We’ve seen clients identify program expenses as administrative expenses and vice versa. As part of our comprehensive financial solution, we analyze the factors that charity rating websites look at—like program expense, administrative expense and fundraising expense percentages, annual reports and fundraising efficiency. We closely review finances, allocation methodology and classification systems, and then make recommendations—ensuring critical financial data is recorded and coded properly. This in turn helps strengthen current and liability ratios, presenting the nonprofit in the most accurate and best light.
By providing nonprofits with financial clarity and best practices in accounting processes, we can help make sure nonprofit charitable ratings are an asset while making sure they remain Audit Ready All YearTM. Our priority is empowering nonprofit clients to focus on what’s most important—fulfilling the organization’s mission.