Deciphering the Landscape of American Nonprofits: A Guide to Evaluating Charitable Organizations
The United States boasts a staggering two million tax-exempt nonprofit organizations, a vast and diverse landscape encompassing everything from major international aid organizations to local food banks. While the Forbes list of America’s Top 100 Charities represents only a fraction of this immense sector, its methodology offers valuable insights into evaluating any charitable organization, regardless of size. The core principles of analysis remain consistent, whether applied to a global giant or a community-based initiative.
The Forbes list ranks charities based on private support received, excluding government grants, revenue from sales, and investment returns. This private support encompasses donations from individuals, corporations, foundations, and other nonprofits, focusing solely on contributions made with charitable intent. Membership dues are excluded as they represent an exchange of value rather than a pure donation. The list also excludes certain categories of nonprofits, such as academic institutions, donor-advised funds, religious entities with undisclosed finances, and organizations lacking direct donor engagement.
For each charity on the list, Forbes calculates three key financial efficiency ratios: Charitable Commitment, Fundraising Efficiency, and Donor Dependency. These ratios provide a snapshot of how effectively a charity utilizes its resources and manages its finances. While comparison across different categories of charities is discouraged, these metrics offer valuable benchmarks for evaluating organizations within the same field. For instance, a potential donor considering a local food bank can compare its ratios to those of food banks on the Forbes list, prompting further inquiry if significant discrepancies exist.
It is crucial to remember that these financial efficiency ratios are just a starting point for donor analysis. Overhead expenses are a necessary component of any organization’s operations, and a high overhead ratio does not necessarily indicate mismanagement. The key is to identify charities with disproportionately high ratios, often resulting from excessive fundraising costs, and seek clarification for these disparities.
Accessing the necessary financial information for analysis is often easier than one might think. Many charities publish their IRS Form 990, financial statements, and annual reports on their websites. Keywords like "financials," "accountability," "990," or "annual report" can guide your search. If these documents are not readily available on the charity’s website, several online resources, including Candid, ProPublica, and the New York State Attorney General’s Office, offer free access to Form 990 filings. Contacting the charity directly is another viable option for obtaining financial information.
Understanding Financial Efficiency Ratios: A Deeper Dive
The Charitable Commitment ratio indicates the proportion of total expenses directly allocated to the charity’s mission, as opposed to management, overhead, and fundraising. Calculated by dividing program support expenses by total expenses, this ratio averaged 87% across the Forbes Top 100. Charities receiving substantial in-kind donations often exhibit higher charitable commitment ratios due to lower fundraising costs associated with these large gifts. While watchdog organizations recommend a minimum of 65%, all charities on the Forbes list surpass this threshold.
Fundraising Efficiency measures the percentage of private donations remaining after deducting fundraising expenses. It’s calculated by subtracting fundraising expenses from private donations, then dividing the result by private donations. The average for the Forbes Top 100 was 91%, implying a cost of 9 cents to raise every dollar. However, this average encompasses a variety of fundraising methods, from low-cost individual donations to more expensive direct mail campaigns. While a 65% efficiency is generally considered acceptable, Forbes sets a higher benchmark of 70%.
Donor Dependency assesses a charity’s reliance on contributions to break even. It is calculated by subtracting surplus from private donations, and then dividing the result by private donations. A ratio of 100% signifies balanced revenues and expenses, while a ratio above 100% indicates expenses exceeding revenues. Conversely, a negative ratio reflects a surplus exceeding private donations, often observed in hospitals with substantial investment income. Interpreting this ratio depends on the donor’s perspective. A donor seeking immediate impact might favor a charity with a high donor dependency, while a donor prioritizing long-term sustainability might prefer a lower ratio, indicating financial stability.
Beyond Financial Ratios: Expanding Your Due Diligence
While financial ratios provide valuable insights, comprehensive due diligence requires exploring additional information sources. Online searches using the charity’s name, along with terms like "scam" or "fraud," can uncover potential red flags. However, it is crucial to verify the credibility of these sources.
Charity watchdog organizations, such as the Better Business Bureau Wise Giving Alliance and Charity Navigator, offer independent evaluations focusing on governance practices and financial health. Charity Watch, though primarily a subscription service, provides valuable resources. State attorney general offices also oversee charitable organizations and can provide information on complaints and legal actions. Finally, the IRS Exempt Organization Search database confirms a charity’s tax-exempt status, ensuring donations are deductible.
A Case Study in Charity Oversight: The California Attorney General’s Investigation
A protracted legal battle between the California Attorney General and several international aid charities highlights the complexities of financial reporting in the nonprofit sector. The AG accused Food for the Poor and Catholic Medical Mission Board of overstating the value of donated goods and inflating financial efficiency metrics in solicitations to California donors. While both charities denied wrongdoing, an administrative law judge and a trial judge dismissed the majority of the case, citing First Amendment concerns. A similar case against MAP International resulted in a settlement without admission of liability. This ongoing legal saga underscores the importance of transparency and accuracy in charitable solicitations and financial reporting.
Empowering Informed Giving: A Call to Action
The abundance of resources available to potential donors empowers informed giving decisions. By utilizing financial ratios, online resources, and watchdog evaluations, individuals can gain a comprehensive understanding of a charity’s operations and impact. This informed approach ensures that charitable contributions are directed towards organizations aligned with the donor’s values and effectively contribute to positive change. Engaging in thorough research strengthens the philanthropic ecosystem, promoting accountability and maximizing the impact of charitable giving.
