How Efficient is Your Charity?
North County Times
June 6, 2002
Commentary by Kyle Waide
Americans love statistics. We use scores, ratings and polls to choose how we invest, what we buy and where we send our kids to school. We demand data to navigate a crowded marketplace. Although bad numbers occasionally lead us astray ---- consider Enron ---- statistics and ratings help us monitor investments, compare products and maximize our hard-earned dollars.
But we are unsophisticated when it comes to supporting charities. Americans donate billions of dollars to charity each year: $150 billion in 2000. We do so without demanding independent evaluations of the charities we support.
Many nonprofit leaders tell us that using data to evaluate charities is misleading. It's impossible to place a simple bottom-line value on what charities do. The important figures for a food bank may be how many meals it serves, while the profit and loss statement may say little about a medical research institute.
However, we can analyze charities' financial information ---- how much a charity spends on fund raising, salaries and overhead, the size of its endowment and so forth. Some nonprofit leaders say that comparisons of fund-raising costs and endowments fail to capture the human value of their work. According to this view, every charity is uniquely valuable, and evaluation of a charity is best left to the charity itself.
This should not satisfy us. How many companies, politicians or eighth-graders would like to tell us how good they are at what they do, instead of undergoing independent evaluation? We do need to compare charities' financial data. While such comparisons don't tell the whole story about a charity, they can tell us if an organization's fund-raising practices are competitive, if its revenue keeps up with its expenses or if it's about to go under.
In launching an online service for rating charities in April, Charity Navigator compared the financial data of more than 1,100 domestic 501 (c)(3) organizations and found, happily, that most charities are fiscally responsible and financially healthy organizations. But we also found that not all charities are equal.
Nearly 23 percent of the charities we evaluated ran an annual deficit in their most recently completed fiscal year. Some 14 percent devoted less than 70 percent of their budgets to their programs and services, and 6 percent devoted less than 60 percent. More than 26 percent have seen a decline in their primary revenue over the past three years, and 10 percent maintain less than one month of working capital.
With hundreds of billions of dollars flowing through charities each year, donors should be able to compare the efficiency of the organizations to which they write checks. Financial analysis helps us learn how charities function now and how they can work better. More sophisticated tools for financial analysis will encourage innovation in all aspects of nonprofit management. When charities face the same pressure to make their services better, faster and cheaper than the competition, we will all benefit from a philanthropic marketplace that drives innovation and generates lasting change.
Our charitable dollars will be maximized only if we bring the same level of sophistication to supporting charities that we apply to our spending in other areas of our lives. We should support charities that show results.
Kyle Waide is deputy director of Charity Navigator (www.charitynavigator.org), a Web-based nonprofit organization that provides independent evaluations of U.S.-based charities.
Reprinted courtesy of the North County Times (©1997-2002 North County Times ).