Are you sure you know exactly how your charity of choice spends your donated dollars? More often than not, the answer is no. The Invisible Children’s Kony 2012 campaign drew renewed attention to this issue when questions were raised about how the co-founders managed the charity’s finances. More recently, a CNN investigation revealed that the Washington, D.C.-based Disabled Veterans National Foundation misused tens of millions of dollars. Their tax filings with the IRS revealed that they spent much of their revenue on fundraising, and that their largest charitable contributions included donating 11,520 bags of coconut-flavored M&M’s to another veterans-related charity.
Find the Right Fit
With more than one million charities operating in the U.S., donors must be proactive in their approach, said Laurie Styron, a financial analyst at CharityWatch (formerly known as the American Institute of Philanthropy).
“Too often donors don’t think ahead about what causes are important to them, and what specific charities will use their donations efficiently,” Styron said. “Instead, many donors give impulsively just because they receive an appeal in the mail, a telemarketing call, or an in-person solicitation on the street.”
When donors fall for these solicitations, they may end up wasting their donations on charities that are not operating effectively. Sandra Miniutti, vice president of marketing and CFO of Charity Navigator, agrees that consumers often give in to knee-jerk reactions. She warns that individuals who give to organizations that solicit them often end up giving to a for-profit, which may keep up to 90% of donations.
“It’s much better to do your research and stick with a few charities to give to year to year,” she said.
Use Your Resources
How can you separate fact from fiction, bypass the marketing ploys, and determine which charities are really worthy of your dollars?
“The biggest mistake donors make is being tugged at by messaging rather than data,” said Clay Johnson, author of The Information Diet, which focuses on how individuals should use publicly available resources to make better decisions.
Among these resources is the Form 990 that all non-profits must file with the IRS. The form provides insight on an organization’s mission, programs, and finances. Individuals can access an organization’s Form 990 through GuideStar, an online resource that currently consists of more than five million Form 990s, available in PDF format. However, keep in mind that the Form 990 is based on self-reported data, which does make it possible for charities to misreport information. Users will have to register with the site for free to access Form 990s.
There is a wealth of other resources available. GiveWell attempts to do much of the non-profit research for givers and focuses on how well programs work. CharityWatch analysts evaluate a charity’s financial reporting, including audited financial statements, tax forms, annual reports, state filings, and other documents. Then, they assign charities a letter grade efficiency rating on an A+ to F scale.
Another site, Charity Navigator, evaluates 5,500 charities, rating them on two dimensions. First, Charity Navigator determines how fiscally responsible they are — how much they spend on programs and services versus administrative costs. Secondly, Charity Navigator evaluates the non-profit’s commitment to accountability and transparency by determining whether the charity has proper procedures in place, such as a whistleblower policy, and whether it makes key financial documents readily available to the public. It then bestows a rating of anything from one to four stars. Much of the information it provides is culled from the Form 990.
Know the Limits of These Resources
While there are resources to help individuals make an informed decisions, they do have their constraints.
“I think [sites like Charity Navigator] are really important because they provide access to a charity’s fundamentals, but it’s important to understand that they’re distilling public data for you,” Johnson said. “So a ‘five star rating’ for a charity is nice, but it’s also editorial.” He said the Form 990 itself provides better context than a five star rating.
Styron also points out limits in Charity Navigator’s ratings system, nothing that their data collection processes are largely computer animated. “It is not designed to provide donors with ratings that reflect a rigorous financial analysis of a specific charity’s financial activities,” Styron said.
Miniutti recognizes the gaps in Charity Navigator’s ratings system, as well as blind spots in its evaluation methods. While Charity Navigator assesses the financial health and transparency of non-profits, the results that these organizations achieve are much more difficult to gauge. For this, donors should give their favorite charities a call or pay them a visit; well-run charities are happy to answer questions posed by prospective donors.
In the next five years, CharityNavigator.org hopes to roll out CN 3.0, which will rate the programmatic impact of organizations based on the information they make available about the outcomes they achieve. The problem, Miniutti said, is that very few charities actively monitor their own results.
When researching charities, donors should expect well-managed charities to spend 75% of their budget on programs and services, and the remaining 25% on fundraising and administrative costs. According to Miniutti, non-profit CEOs average earnings of $150,000 per year, but this figure is subject to variation, depending on the size of the charity, its location, revenue, and a multitude of other factors.
However, experts say these figures should serve only as a benchmark and that donors should not obsessively scrutinize salaries and administrative costs. Instead, Johnson suggests that prospective donors consider how executive compensation measures as a percentage of the charity’s total budget. Compare salary levels at a preferred charity against other charities operating in the same space. Again, donors should measure the productivity of a charity and its ability to implement the funds it raises in worthy projects and services.
“We need to worry less about the finances of a charity and more about whether or not we’re investing in the ones that are making actual differences,” Johnson said.