This is part of The Globe and Mail's in-depth look at the evolution of philanthropy. Read more from the series here.
You’ve decided which causes you’d like to contribute to, and you’ve worked out how much you can give. But as you plan your strategic giving for the year, how do you determine which charities will make the best use of your donations?
Before you write your cheque, Sandra Miniutti, vice-president of marketing and chief financial officer of the U.S. charity evaluator Charity Navigator, suggests examining organizations, based on these key factors: financial health, accountability and transparency, and, most importantly, results. Is the charity accomplishing its mission?
Charity Navigator analyzes around 5,500 U.S. charities. In Canada, MoneySense magazine’s Charity 100 rates the country’s top 100 charities. Charity Intelligence Canada has researched around 350 charities over the past four to five years, and provides analyses on those it recommends online. (It will also soon launch an independent online guide that will allow donors to search for audited information on 100 major Canadian charities.)
While a charity’s accomplishments are key to determining its effectiveness, Ms. Miniutti emphasizes that finances cannot be overlooked. “We maintain that a charity that has their financial house in order is going to be more effective in delivering those results,” she says.
EXAMINING FINANCES
One way Charity Navigator determines a charity’s financial health is by looking at whether it owes more than it owns, and whether its bills at year end are more than it can afford to pay.
Ms. Miniutti recommends looking at about three to five years’ worth of an organization’s finances. You should be able to find recent audited financial statements on its website, or you can request them.
Being in the red one year isn’t necessarily a bad sign, she says. A charity may go into debt if it identifies a need it can immediately fulfill. Or, it may have a rare large expense, such as buying computers or other equipment that will help it become more efficient. But if you see a trend where the charity consistently owes more than it can pay, you may want to look elsewhere.
Another way to assess an organization’s financial situation is to examine its “program cost coverage,” which determines how much funding it needs. As Bri Trypuc, head of donor services at Toronto-based Charity Intelligence Canada (Ci), explains, program cost coverage is the ratio of a charity’s funding reserves to its annual program costs. If that ratio is more than 100 per cent, the charity has more money than it needs to operate in a year.
“The startling thing that we found at Ci is that there’s many charities that fundraise because they can, not because they need the money,” Ms. Trypuc says, adding that these organizations may simply accumulate funds in their reserves.
If an organization’s program cost coverage ratio falls within 25 and 100 per cent, your donation will most likely be used to deliver charitable works within a year. If it exceeds 100 per cent, you may want to consider a charity whose immediate needs are greater.
Experts also advise comparing the amount of money the organization spends on administrative and fundraising costs against its program costs. In general, Ms. Miniutti says, the most efficient charities spend 75 per cent of their money on programs, and 25 per cent on administration and fundraising.
ACCOUNTABILITY AND TRANSPARENCY
A lack of transparency or accountability regarding donor funds should automatically raise red flags, Ms. Trypuc says. While charities and not-for-profit organizations that are registered with the Canadian Revenue Agency must, by law, submit their financial information to the government agency, she says they are not legally required to give this information to the public. Still, you should be suspicious of a charity that hides its financials.
