Five Ways to Check a Charity
How to make sure your donation will be put to good use.
By Jane Bennett Clark, Senior Associate Editor
From Kiplinger's Personal Finance magazine, January 2009
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With times hard and people hurting, you have every reason to find out whether a charity has the resources and know-how to put your money to good use. Use the following five measures to gauge its current condition.
1. Look at spending priorities. "Now more than ever, it's critically important that you invest in only the most efficient charities," says Sandra Miniutti, of Charity Navigator, which rates the financial health of more than 5,300 of America's largest charities on its Web site (www.charitynavigator.org). Aim for organizations that spend at least 75% of their budget on programs and split the remaining 25% between fund-raising and overhead.
2. Evaluate accountability. Be sure the group has a well-defined mission and the organizational structure to support it, says William Hewitt, of Crown Philanthropic Solutions, which helps foundations and financial-services institutions set up donor-advised funds. "A lot of smaller nonprofits go for decades and never have a significant impact. You wonder where the money is going and whether it has a real use."
3. Beware red ink. Charities must file a Form 990 with the IRS annually (if you can't find the form on the charity's Web site, call and request a copy). Look for the line that indicates whether the charity has positive or negative assets. If the answer is negative, steer clear, says Laurie Styron, of the American Institute of Philanthropy, which rates charities online at www.charitywatch.org. "Your donation may go to legal or accounting fees, or to pay past debts relating to the charity winding down, rather than to the programs you're intending to support."
4. Gauge the cushion. A charity can better withstand hard times if it has six months' to a year's worth of working capital, expressed as its "working capital ratio" at Charity Navigator. "If it has less than that, I'd call up and ask how it is dealing with the current economic crisis," says Miniutti. "Is it going to be able to deliver on its programs?"
5. Review the charity's annual report. Look for the word "unqualified" in the auditor's note, which indicates that the auditor has signed off on the charity's finances without reservation. If, on the other hand, the audit is "qualified," it means that the auditor may have substantial doubt that the charity can exist for another year, says Styron. Circumstances that trigger such concerns include the loss of a major donor or an overall decline in contributions.
Reader Comments (2)
Posted by: Charlie Mattingly at 11/25/2008 06:45:40 PM
The best place to check out charities is www.bbb.org, where the Better Business Bureau's Wise Giving Alliance posts reports that evaluate charities against 20 standards for charitable accountability. Charities that meet BBB/WGA standards are charities that will handle your hard-earned dollars responsibly to benefit the causes that you have chosen to help.
Posted by: MP at 02/22/2009 10:00:20 AM
A couple of thoughts - why not choose to get involved with a charity as a volunteer? Then you can really get a sense as to how they operate and if your donation will be well spent. Also, be careful when using watchdog sites like Charity Navigator and even the organization's 990s. The way some information is analyzed and reported is misleading. As just one example, special event income in the 990s is reported such that events that actually net thousands can look like they lost money due to the peculiar way the 990s request event information. (ie expenses are subtracted from ticket sales when in reality an event typically has tens of thousands of dollars in corporate sponsorships - contributions - that's how money is made, not through ticket sales. Contributions are reported on a separate line.) Also if a charity is "in the red" consider the percentage of the loss to the overall budget. Donors give on their own timetables and sometimes it is just a matter of timing. A $50,000 gift expected on June 30th arrived on July 1. In a $4 million budget that shouldn't be a big concern. If it is a $200,000 budget, that's another story. Watchdog sites are a starting point but be sure to also check out the charity with the charity itself.