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Introducing CN 2.1: Enhanced Financial Health Rating Metrics

 
 

Charity Navigator is proud to announce our new charity rating methodology. Called CN 2.1, this updated version of our charity rating system consists of changes to our financial health rating metrics. The new methodology was developed in consultation with industry leaders, academics, charity representatives, our Financial Measures Task Force, our Advisory Panel, donors, and our staff. Our goal was to develop a set of financial rating metrics that meet the needs of both donors and charities while remaining consistent with our initial unbiased, objective, and data-driven approach to rating charities.

“The new financial metrics in 2.1 have come a long way in honoring Charity Navigator’s commitment to fighting the Overhead Myth while still providing information on nonprofit financial health.” ~ Elizabeth A.M. Searing, PhD, CNP, Assistant Professor, Department of Public Administration & Policy,Rockefeller College of Public Affairs & Policy, University at Albany

CN 2.1

Charity Navigator's rating system examines two broad areas of a charity's performance: its Financial Health and its Accountability & Transparency. Under version 2.1, the seven metrics used to assess a charity’s Financial Health have been updated. We have made no changes to our Accountability & Transparency metrics.

Rating Metric

Prior Rating System

Version 2.0

New Rating System

Version 2.1

Program Expenses

Calculated by using the data from the charity’s most recent fiscal year

Program Expenses ÷ Total Expenses

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Program Expenses ÷ Average Total Expenses

Administration Expenses

Calculated by using the data from the charity’s most recent fiscal year

Administrative Expenses ÷ Total Expenses

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Administrative Expenses ÷ Average Total Expenses

Fundraising Expenses

Calculated by using the data from the charity’s most recent fiscal year

Fundraising Expenses ÷ Total Expenses

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Fundraising Expenses ÷ Average Total Expenses

Fundraising Efficiency

Calculated by using the data from the charity’s most recent fiscal year

Fundraising Expenses ÷ Total Contributions

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Fundraising Expenses ÷ Average Total Contributions

Primary Revenue Growth

Calculated using the standard formula for computing annualized growth using data from the charity’s last three to five most recent fiscal years

[ ( Yn / Y0 ) ^ ( 1 / n ) ]  - 1

No longer part of the rating system

Program Expense Growth

Calculated using the standard formula for computing annualized growth using data from the charity’s last three to five most recent fiscal years

[ ( Yn / Y0 ) ^ ( 1 / n ) ]  - 1

No change

 

Working Capital Ratio

Calculated by using the data from the charity’s most recent fiscal year

Working Capital ÷ Total Expenses

Calculated by using the data from the charity’s most recent fiscal year for working capital, but using data from the charity’s three most recent fiscal years for total expenses

Working Capital ÷ Average Total Expenses

Liabilities to Assets Ratio

Not Included

New metric

Calculated by using the data from the charity’s most recent fiscal year

Total Liabilities ÷ Total Assets

Rating Metric: Program Expenses

Prior Rating System Version 2.0

Calculated by using the data from the charity’s most recent fiscal year

Program Expenses ÷ Total Expenses

New Rating System Version 2.1

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Program Expenses ÷ Average Total Expenses

 

Rating Metric: Administration Expenses

Prior Rating System Version 2.0

Calculated by using the data from the charity’s most recent fiscal year

Administrative Expenses ÷ Total Expenses

New Rating System Version 2.1

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Administrative Expenses ÷ Average Total Expenses

 

Rating Metric: Fundraising Expenses

Prior Rating System Version 2.0

Calculated by using the data from the charity’s most recent fiscal year

Fundraising Expenses ÷ Total Expenses

New Rating System Version 2.1

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Fundraising Expenses ÷ Average Total Expenses

 

Rating Metric: Fundraising Efficiency

Prior Rating System Version 2.0

Calculated by using the data from the charity’s most recent fiscal year

Fundraising Expenses ÷ Total Contributions

New Rating System Version 2.1

Calculated by averaging the data from the charity’s three most recent fiscal years

Average Fundraising Expenses ÷ Average Total Contributions

 

Rating Metric: Primary Revenue Growth

Prior Rating System Version 2.0

Calculated using the standard formula for computing annualized growth using data from the charity’s last three to five most recent fiscal years

[ ( Yn / Y0 ) ^ ( 1 / n ) ]  - 1

New Rating System Version 2.1

No longer part of the rating system

 

Rating Metric: Program Expense Growth

Prior Rating System Version 2.0

Calculated using the standard formula for computing annualized growth using data from the charity’s last three to five most recent fiscal years

[ ( Yn / Y0 ) ^ ( 1 / n ) ]  - 1

New Rating System Version 2.1

No change

 

 

Rating Metric: Working Capital Ratio

Prior Rating System Version 2.0

Calculated by using the data from the charity’s most recent fiscal year

Working Capital ÷ Total Expenses

New Rating System Version 2.1

Calculated by using the data from the charity’s most recent fiscal year for working capital, but using data from the charity’s three most recent fiscal years for total expenses

Working Capital ÷ Average Total Expenses

 

Rating Metric: Liabilities to Assets Ratio

Prior Rating System Version 2.0

Not Included

New Rating System Version 2.1

New metric

Calculated by using the data from the charity’s most recent fiscal year

Total Liabilities ÷ Total Assets

Impact

Under the new CN 2.1 methodology, about 27% of the 8,000 rated charities received a new star rating: 19% received a 1-star increase and about 8% experienced a 1-star decline. And several charities earned perfect 100 point overall scores.

For More Information

“CN 2.1 promises to be a positive step forward, by reflecting several emerging realities of today’s successful organizations.  This should also lead into and connect well with Charity Navigator’s vision for outcomes-focused CN 3.0.” ~ Tom Moser, Retired Audit Partner and Vice Chairman, KPMG LLP
 
 

 

“Charity Navigator 2.1 clearly improves how financial performance data from charities is assessed with the goal of providing donors the most relevant information to make informed and intelligent giving decisions. Among other helpful updates, by using three-year averaging for certain key financial metrics 2.1 reduces the chance of communicating potentially distorting performance data due to a single-year event. Congratulations to CN for implementing a comprehensive and inclusive process in designing this important update.” ~Michael C. Meenan, Senior Vice President & Chief Financial Officer, Special Olympics
 
 

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