A common question any organization faces is how to balance resources for the short, medium, and long term. Doubling or tripling down on what works now and putting all your resources into a product or service can earn you some quick results or attention, but could paralyze you long-term, as the terrain shifts and costs change. These same rules apply to nonprofits, who are constantly challenged to strike a balance between long-term investment and longevity and the efficient throughput of money, assistance, or services from donors to the cause in question.
Tools like Charity Navigator assess and rank nonprofits based on their efficiency, sometimes down to the amount of cents per dollar donated that goes towards a nonprofit’s mission. These have become useful research tools for individuals and organizations who want to donate to a cause, but they have also led to certain factors being overlooked or undervalued. Just like a search engine, which continually has to refine itself to better meet the expectations of its users, these charity ranking tools have experienced criticism and pressure from nonprofits and researchers who do not feel they fairly weigh the different factors present when assessing a nonprofit.
This was brought into focus during the COVID-19 pandemic, when many nonprofits who were accustomed to running “lean”, saving very little to no money and maintaining low overhead costs, suddenly had to adapt to a wildly different environment. Many organizations did not survive the upheaval, leading many to reassess what metrics can be best used to calculate organizational “efficiency”.
Charity Navigator, a database of 209,503 charities and nonprofits, recently released some major changes to their assessment criteria. Per their press release, they hope these changes “level the playing field” for nonprofits. Here are the changes and the thinking behind them, as well as some ways you can account for them:
What did they remove from their assessment?
Charity Navigator uses four “beacons” to summarize and rate the characteristics they feel are critical to nonprofit success: Accountability & Finance, Impact & Results, Leadership & Adaptability, Culture & Community. They decided to break the Accountability & Finance into tiers, so as to not group nonprofits with smaller revenue in with larger, donor-supported nonprofits. By breaking up the evaluations this way, the assessments take a much more thorough look at the accounting practices of large organizations, while allowing space for the unique circumstances and challenges smaller ones face.
They also decided to stop using certain metrics which focus on efficiency at all costs: administrative expense percentage, fundraising expense percentage, and program expense growth are all being discarded. At first glance, it might seem like these are a useful way to determine efficiency, but recent events and a closer examination of nonprofits shows that a holistic approach that weighs outcomes more strongly than efficiency can lead to more sustainable benefits.
For example, if an organization is achieving major breakthroughs with their programs but spending more than average doing it, it should not be considered inefficient. Likewise, an organization which boasts a threadbare budget with minimal overhead might not be able to withstand shifts in the economy or other issues, which could lead to the organization struggling or failing to achieve anything other than being ‘efficient’ with donor dollars.
What’s new in their assessment?
Because of the economic shockwaves brought about by the COVID-19 pandemic, many nonprofits and charities had a difficult time making ends meet, let alone meeting their mission and goals. To account for this, Charity Navigator will allow any organization which suffered financially during the pandemic years of 2020 and 2021 to leave their 990 forms from those years off of the assessment. This allows those organizations to not continue to suffer from lack of donors because of the unforeseen impact of the pandemic.
The Accountability & Finance beacon, which takes a look at an organization’s finance, structure, governance, and transparency, will be restructured with a “new point allocation”. They’ll look at numerous factors, including internal documentation of board meetings, board structure, members, and transparency, the privacy of donors, and compensation. However, points will be allocated not based on a single framework but on willingness to utilize best practices, maintain transparency, and both short- and long-term planning for financial health and stability.
A major change, which reflects a broader shift in all sectors worldwide, is the inclusion of an Equity assessment as part of the Culture & Community beacon. This assessment will be based on a set of best practices put together by Candid, which allow Charity Navigator to accurately assess the efforts that your organization is taking to improve Diversity, Equity, and Inclusion. This assessment includes basic demographic data collected from leadership and staff, as well as a more in-depth assessment of the ways your organization is proactively seeking out and solving issues like income disparity, inclusiveness in decision making, and equitable hiring practices.
What does this mean for my nonprofit?
While these changes show a major change in the way nonprofits are assessed, it could be some time before the effects are seen in donor behavior. As many have shown, the drive to cut costs and be ‘efficient’ above all else has led to major issues in the nonprofit world, but from a donor’s perspective, the idea that nearly all of your money is being allocated directly to a cause is a compelling one. If you are hoping to embrace this shift in philosophy, it would be a good idea to document and share what you are doing with the money, particularly if you aren’t looking to work ‘lean’ with minimal overhead. Taking the time to explain to current and potential donors why you allocate money the way you do will help them build trust and investment in your long-term plans and mission.
Plan for the future with our team
As longtime nonprofit professionals, we know very well the pressures your organization is under to attract donors and maintain efficiency while also planning for the future. Striking this balance can be hard, but our team of experts can help you identify new sources of revenue or inefficiencies to help you plan ahead while completing your objectives and attracting new donors. If you’d like to learn more about how we can help, please get in touch.
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(Photo by RDNE Stock project, GivingTuesday)
The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
