Evaluating a charity for a donation is much like evaluating a company for an investment – you have to look at several different factors, both quantitative and qualitative. Meanwhile, you have to consider a double-bottom-line for charities: not just how sustainable the organization is financially, but also how much impact the organization has. In this post, I’ll talk about some of the factors that I look at when assessing whether to donate to a nonprofit.
Financials
Financial data has the benefit of being both (1) quantitative and (2) widely and readily available, thanks to sites such as Charity Navigator. Thus, it’s ideal for quickly filtering through charities along some objective, quantitative criteria. However, finances aren’t everything, so I use them as binary variables – either a charity checks the box, or it doesn’t. Unlike with companies, the factors that make charities stand out aren’t golden financial statements.
Important metrics include:
Expense Ratios: Where does the money go: what percentage of the expenses went to fundraising, administrative purposes, and programs? I didn’t want to give to a charity where less than 85% of the expenses were allocated to the charitable programs themselves. Furthermore, the ideal charity is able to allocate a larger percentage of program expenses over time.
Net Assets + Revenue/Expense Ratio: What did the organization’s overall financial health look like? Some charities have high levels of net assets, and others collect substantially more in donations each year than they spend on programs. For me, I preferred to target charities that were in greater financial need of a donation (as opposed to those with substantial cash reserves), which I quantified by adding the charity’s net assets to last year’s revenue, and dividing by last year’s expenses. If the number wasn’t under 2, I didn’t want to donate to it [1].
Year-over-year Growth: Ideally, a charity has a larger impact each year than the year before. A readily available proxy for this was annual program expenses, and I don’t want to support charities that are stagnant or worse, declining in activity. Filtering on this can be unforgiving to charities with rare circumstances, so I prefer to compare program expenses over several years.
Accountability and Transparency: How transparent are the charity’s financials to the public? Are there conflicts of interest, or procedures to prevent and mitigate them? While many factors play into this category, I decided to just use Charity Navigator’s Accountability and Transparency score, and I didn’t consider charities with scores under 90.
Underlying Problem
Charities exist is because Earth isn’t Utopia. Accordingly, evaluation of a charity begins with exploring the underlying problem at hand – a mismatch between food supply and demand, a problem with reading materials, government corruption that prevents proper services from being provided or distributed. How much the underlying issue that’s being tackled matters to you will vary – some people care more about education than health, taking care of veterans than the homeless, providing clean water than caring for the environment. That’s perfectly fine – you ought to decide to support a charity that you feel strongly about. Nevertheless, some relevant factors worth considering include:
Social Impact: How important is the issue? What does the “social return on investment” look like?
Issue size and severity: How large is the issue – how many people are affected by it, and how strongly does it affect them?
Equity: To what extent does the problem disproportionately affect those in underprivileged groups?
Mission & Programs
Once you understand the underlying problem, it’s time to start looking at what exactly the organization does to fight it. Again, some relevant factors include:
What they do: What programs and efforts does the charity lead in order to fight the problem? How exactly are they involved with those programs? What resources do they provide? How much traction have they received so far?
“Business” model: Do the programs work? Are they scalable? What’s limiting expansion and growth? How easy to access is their product/service?
Key members: who are the people involved in the organization? What’s their background, and why is it relevant to what the organization Is trying to accomplish?
Competition: What distinguishes the organization from similar ones trying to accomplish similar goals?
Looking through the organization’s annual report (which is almost always easily accessible online) should be an easy way to understand more about the problem that the charity is tackling, the work they do, and their financial position. In the next two posts, I’ll share more about my favorite charities.
[1] Some people would argue the other way – that you shouldn’t donate to charities with a risk of going bankrupt. Indeed, this rule lacks universalizability, in that if all philanthropists were to follow the “target charities with financial need” rule, then all charities would constantly flip between being rich and poor.