Don't forget about the charities!

Here's an analysis I wrote for a recent class. It outlines the available financial performance measures for charities. One of the most comprehensive and widely accepted organizations rating the financial performance of charities is Charity Navigator.

I currently volunteer on a limited basis for a charitable non-profit organization called Kalamazoo Animal Rescue (KAR). I did more in the past fostering animals, but I still manage their MySpace page. I've seen firsthand the struggles faced with an organization like this. It is very difficult not to want to take on every charity case there is, especially the heart-breakers. However, the reality is this: the heart-breaking cases are expensive.

The section "Tough Ratings or Poor Charities?" is particularly relevant to an organization like KAR. Charity Navigator does not rate KAR, most likely because they only rate charities with annual operating budgets over $500,000. I think it would helpful if smaller charities were rated. It would help them focus on the things that are important, and will give the organization more access to donors who regularly check the site.

In this economic crisis, these organizations are hurting financially. This necessitates their leaders to run them more like businesses and less like charities.

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Jesse T. Palmer
January 20, 2009
Cornerstone University - MGT-441

Week Three Assignment – Wall Street Journal Article Summary

Bialik (2008) describes some of the challenges of reporting financial performance of charities. Unlike stocks, charities have no single performance measure that gives a good representation of the success or failure of the charity. There has been some work done to try to formulate a better way to rate charities, but the task has proven to be too daunting.
The non-profit financial world has been said to be much more complex than the for-profit world. For example, food banks spend less than 2% of their budgets on administrative costs, while the average charity spends nearly 9%. These and other differences can make it difficult to maintain objectivity when an organization rates a non-profit’s fiscal standing.

Existing Research
Potential donors will research a charity before donating to it. They can do this through a popular site called Charity Navigator. The site rates more than 5,000 charities. It gives them a rating from zero to four stars, relative to the charity’s peers. The ratings come from many areas, for example – administrative costs. Charity Navigator is the quickest way for anyone to research the performance of many charities.

Rating Issues
There is a major problem with the existing ratings scales. It has caused some charities to become very focused on it. They have made decisions to only focus on the things that are rated, and neglect the rest. In this regard, the ratings system has hurt the outcome of some charities.

One of the ratings deals with the amount of savings the charity maintains. This restricts some charities from releasing their funds as they should. Funds are held that could otherwise benefit those who the charity is there to help.
Some charities have even reallocated expenses to make the ratings better. This has raised some concerns because it stretches the definitions for the spending accounts. This does not really affect the good that the charity performs, but can falsely raise their ratings. These false high ratings can affect other charities, and reduce the amount of donations they receive.

For others, the ratings system has proven to be a source of motivation to perform better. These charities take the ratings as a great way to see where they can become better at what they do. It is a source of outside opinion to help the charity improve and see things that they may not be able to see from within.

Tough Ratings or Poor Charities?
Some charities have a hard time with the ratings given to them. There are charities that are so focused on their purpose that they lose sight of their financials. These “bad charities with heart” (Bialik, 2008), are doing great things. However, if they ultimately fail to maintain the funds to survive, they will not be helping anyone.
I personally have been involved with a charity that had great intentions, but poor financial management. I was involved with an animal rescue in Kalamazoo for a few years. It was always very difficult for people to make the hard decisions that may neglect or kill an animal, but save the charity a lot of money. The members of the charity had great hearts, but did not realize that their decisions were running the charity into the ground.

Single Rating Skepticism
Bob Ottenhoff feels that there is no single measure that is perfect for rating every charity, like a p/e ratio for a for-profit company. For now, the best way to judge a charity’s performance is to look at the available ratings. Ultimately, a donor’s money goes to what they believe in. It is often hard to separate business of the charity from the heart of it, but nonetheless, it is necessary.

References
Enrich, D. (2009, January 10). Citigroup Takes First Step Toward Breakup --- Pushed by Federal Government, Beleaguered Giant Pursues Brokerage Venture With Morgan Stanley; Robert Rubin to Retire. Wall Street Journal, pp. A.1

Harvard Business Essentials. (2005). Strategy: Create and Implement the Best Strategy for Your Business. Boston: Harvard Business School Publishing Corporation.