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Kent's blog

Characteristics of High-Performing Nonprofits

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"By honest I don't mean that you only tell what's true. But you make clear the entire situation. You make clear all the information that is required for somebody else who is intelligent to make up their mind."
-- Richard P Feynman, The Meaning of It All

It shouldn't require a PhD to understand the effectiveness of a public charity. All U.S. taxpayers are constituents of tax-exempt charities. As such, charities have the obligation to provide the public with enough information for an intelligent individual to assess the effectiveness of the organization. Because of this, transparency is of paramount importance when evaluating a nonprofit.

Donors have different objectives and priorities. Our goal at Nonprofit Investor is to take all publicly available information about a charity (IRS filings, annual reports, websites, press, interviews, etc.) and highlight what we view as the key strengths and areas of improvement of each nonprofit we evaluate. While we summarize our thoughts with a rating ("BUY", "NEUTRAL" or "SELL"), our hope is that our reports and ratings are simply a starting point for thoughtful discourse.

After evaluating 60 nonprofits, here are a number of common characteristics we have identified amongst high-performing nonprofits:

Program Characteristics

  • Clear description of programs delivered by the nonprofit. How are the programs structured? Are they delivered in cooperation with local communities? How was the program methodology developed and how has it improved over time?
  • Clear description of the need addressed. Some causes may be self-evident, but it is still important for the nonprofit to explain the specific reason the organization addresses the cause in its specific way. For example, why focus on job training for the homeless vs. directly provide food for the homeless? How does the nonprofit address a specific need in the context of other services available to those in need?
  • Number of beneficiaries served. Who benefits from the nonprofit's work? This number is particularly important for accountability. (See our post on cost per beneficiary)

Impact and Outcome

  • Tracking and disclosure of key program metrics. Key program metrics (e.g., number of schools built, number of students placed in colleges, number of meals served) should be regularly tracked and disclosed. High-performing nonprofits use measurement of results to improve performance. Consistent disclosure of this information on public record (annual report, IRS filings) enhances public accountability.
  • Tracking and disclosure of long-term outcomes. For some organizations, this may take the form of randomized controlled trials (RCT). However, given the expense and time required to show statistically significant results, we find alternatives such as well-matched comparison group studies to be adequate for nonprofits to effectively measure and drive outcomes.

Financial Transparency

  • Clear disclosure regarding all resources going into the organization. In addition to financial resources, many nonprofits receive donations of physical goods or services that have significant, fungible value. Additionally, funding going to/from affiliates must be appropriately disclosed.
  • Accountability of use of funds is a bonus. For example, nonprofits such as charity: water provide a clear audit trail of how donor funds are used to fund specific projects. This may be impractical for non-project based organizations.
  • Audited financial statements publicly available. Audited financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) on an accrual basis can provide useful and meaningfully different information than cash basis IRS filings.

Financial Sustainability

  • Fiscal discipline. Nonprofits often face high funding volatility. While this is often unavoidable and in some cases may be a reason for new donors to get involved, management must show the ability to make adjustments in down years. For example, if nonprofits run multi-year deficits and deplete cash reserves to less than twelve months, donors have little assurance that the organization will remain a going concern.
  • Program revenues can be a plus. Some nonprofits may be able to generate significant program revenues to supplement grants and contributions. For example, revenue generated by Delancey Street Foundation's social businesses fund two thirds of their total expenses. Diversification of funding sources can provide stability to a nonprofit's overall funding profile.

Track Record and Recognition

  • Awards and recognition by foundations may reflect strong performance but cannot necessarily be relied upon. Foundations have diverse objectives that may or may not align with personal objectives.
  • High ratings by nonprofit evaluators (including NPI) may not align with personal objectives. Scrutinize the methodology and the rationale of any ratings system before relying upon it.

Check out the key takeaways from our evaluation of 60 nonprofits in our Ratings Rationale document. Also, full research reports are available for free download here: NPI Research.

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Military and Veterans Nonprofits

Nonprofit Investor recently reviewed four nonprofits serving our country's military, veterans and families: Iraq and Afghanistan Veterans of America (IAVA), National Military Family Association, Operation Homefront and Swords to Plowshares.

With nonprofits such as DVNF recently in the news for squandering hundreds of millions of dollars of donor funds, it is important to identify and highlight organizations working in the field that are truly helping our veterans and military families.

Nonprofit Investor performed an independent evaluation of four charities in the space, with two receiving our top "BUY" rating, demonstrating clear impact with a high degree of transparency:

  • Iraq and Afghanistan Veterans of America (IAVA), the first and largest nonprofit organization for the newest generation of veterans from the Iraq and Afghanistan wars, demonstrates a solid vision for holistically interceding for veterans’ causes and rigorously measures its reach (active members, times before congress, media covereage, etc.).
  • National Military Family Association fights for benefits and programs that stengthen and protect uniformed services families and has a long track record of success and effectively deploys its resources to create an outsized impact towards its goals.

Two nonprofits received our "NEUTRAL" rating, with significant areas to improve upon:

  • Operation Homefront provides services to alleviate a military family’s or individual’s emergency financial burden, as well as counseling and recovery support. The organization has developed a model which requires limited spending on fundraising and administrative functions. However, Operation Homefront's disclosures are insufficient to truly evaluate the impact and cost of the organization's effort in the context of its complex affiliate structure.
  • Swords to Plowshares has made great strides in providing a variety of services to reduce homelessness among veterans and has even engaged other community organizations with specialized expertise to help with their efforts. However, the organization has operated at a financial loss for 3 years, which may threaten the sustainability of the organization.

A nonprofit such as DVNF would have received a "SELL" on our rating scale.

Every nonprofit has both strengths and areas to improve upon. We encourage you to read our full reports to help you make the giving decision that best aligns with your philanthropic goals.

Please contact us or comment below with any feedback or to suggest a nonprofit for us to evaluate. Check out our publicly available research on 50+ nonprofits across a varitety of causes here: NPI Research.

 

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Nonprofits with Separately Reporting Affiliates

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In a previous post, we discussed how NPI evaluates cost per beneficiary. Cost per beneficiary is not a number to be compared directly across organizations but rather as a way to understand how much it costs a nonprofit to deliver its specific services and generate its specific impact.

Some larger nonprofits are structured as multiple entities, with a parent organization and affiliate organizations filing separately with the IRS. Parent or headquarter organizations provide a wide spectrum of services to affiliates which may include training, planning, research, marketing and advertising. While there are valid reasons for structuring an organization like this, detailed disclosures are required to understand how the impact of the organization relates to the financial input to the parent vs. affiliates.

For a nonprofit with a single-entity corporate structure, we calculate: Cost per Beneficiary = (Total Cost to Deliver Services) / (Number of Beneficiaries Served), where time periods for numerator and denominator must match.

For a nonprofit with separately reporting affiliates, there are several ways to calculate and evaluate cost per beneficiary. Because supporters of a nonprofit have many different priorities and also have the ability to decide which entity to support, certain approaches may be more relevant than others:

  • Evaluate a single affiliate. Many affiliates of the same nonprofit may operate very differently or operate in very different contexts. For example, The Boys & Girls Club of the Peninsula addresses a specific geographic community and may provide different programs and generate different results than other Boys & Girls Club locations.
  • Evaluate the parent organization. A nonprofit may be able to measure and disclose the impact attributable to the parent organization itself. For example, the KIPP Foundation makes clear that KIPP schools report results separately and that the parent organization provides services to the affiliate organizations.
  • Evaluate the consolidated organization. Evaluating the consolidated financials of the parent and affiliates and the total impact of the parent and affiliates provides a holistic view of the organization and model.

While approach number three provides the broadest view of an overall organization and its impact, it also requires the nonprofit to provide detailed disclosures that go beyond statutory requirements.

Here's how we look at consolidating the key numbers for this calculation:

Consolidating the Numerator (Cost to Deliver Services). The total cost to deliver services for the entire organization consists of the sum of all parent expenses plus all affiliate expenses, minus any overlap in expenses (e.g. grants provided from the parent to affiliates). While the sum of all parent expenses plus all affiliate expenses is easy to calculate from IRS filings, the overlap in expenses is not always clear from the IRS Form 990 and typically requires additional disclosures by the nonprofit.

Consolidating the Denominator (Number of Beneficiaries Served). While determining total number of beneficiaries served by a parent organization and affiliates may seem like a simple addition exercise, the reality is that the total number is only as good as the quality of the underlying numbers plus the methodology used to aggregate the data (either by the nonprofit or an outside evaluator). Additionally, if the data is aggregated by the nonprofit itself, transparency into that process and consistent disclosure of source numbers is necessary to provide credibility to the data.
While there are many approaches to evaluating nonprofits with affiliate structures, above all, it is the responsibility of nonprofits with this type of structure to clearly distinguish which impact metrics are attributable to which part of the organization. Below are nonprofits evaluated by NPI which have separately reporting affiliates. Please note that NPI has continued to evolve its thoughts around nonprofit evaluation. As we have learned more about affiliate structures, some of our research will be revised (noted below) to reflect what we have learned.

Here are the nonprofits with affiliate structures that we have reviewed and how we evaluated them:

  • Accion USA. Several other organizations share the Accion name but Accion USA's revenues and expenses are specific to Accion USA. NPI's report on Accion USA is an evaluation of Accion USA and not its affiliates.
  • Boys & Girls Club of the Peninsula. NPI evaluated the Peninsula entity only.
  • Dress for Success. NPI's initial evaluation of Dress for Success was published over a year ago and is now being re-evaluated, with additional focus on the ramifications of their affiliate structure.
  • Endeavor Global. Endeavor Global clearly distinguishes between Endeavor Global and the rest of the Endeavor organization. While disclosures allow us to approximate the correlation between financial input and results achieved, NPI's report recommends additional disclosures around the amount of funding provided from the parent organization to the affiliate organizations. This issue was not significant enough to preclude NPI's "BUY" rating on Endeavor Global.
  • KIPP Foundation. KIPP Foundation makes clear disclosures regarding programs provided by KIPP Foundation vs. KIPP schools.  NPI's report focuses on the Foundation's operations and distinguishes between results attributable to KIPP schools.
  • Reading is Fundamental. NPI's initial evaluation of Reading is Fundamental was published four months ago and is now being re-evaluated, with additional focus on the ramifications of their affiliate structure.
  • VisionSpring. NPI report recommends clearer documentation regarding VisionSpring India affiliate in order to provide assurance that disclosed results are entirely attributable to donations to the U.S. organization.
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"Cost per Beneficiary" and What it Means

A key criteria for a nonprofit to be rated as a "BUY" from NPI is the ability to correlate financial input to a nonprofit with programs delivered by the organization. Being able to make this connection is important to allow donors to understand how their donations translate to services and impact. One way to make this connection is to calculate the all-in cost for a nonprofit to deliver services to its beneficiaries. This number ("cost per beneficiary") is relevant within the context of the quality and impact of those services.

What Does this Mean? Cost per beneficiary is not a metric that can be used to compare directly across different nonprofits. For example, two nonprofits providing afterschool programs with the same cost per beneficiary may provide a very different depth of service offering. However, for an individual nonprofit, it is important for a donor to be able to understand how much it costs the nonprofit to deliver its specific services and generate its specific impact.

Calculation. Cost per Beneficiary = (Total Cost to Deliver Services) / (Number of Beneficiaries Served), where time periods for numerator and denominator must match.

Cost to Deliver Services. At a high level, the cost for a nonprofit to deliver services each year is the total expenses of the organization. Nonprofits are required to provide this information in their Form 990 filed with the IRS each year. This basic calculation does not exclude overhead expenses. Categorizations of expenses vary greatly between nonprofits and all expenses are relevant to understanding the financial input required for a nonprofit to deliver services.

Number of Beneficiaries Served. While the IRS does not require nonprofits to disclose how many beneficiaries are reached by the organization's services, this data is of paramount importance. Because this data is typically self-reported and unaudited, several factors must be used to assess the reliability of the data. For example, does the organization disclose how the data is collected? Does the nonprofit disclose the figures in published documents each year? Are numbers consistent across annual reports, the nonprofit's website and other documents?

Complexities in Calculating Cost per Beneficiary. Many unique circumstances require additional information and analysis to calculate a meaningful cost per beneficiary number. A few complexities that we have encountered include:

  • Nonprofits with Separately Reporting Affiliates. Some larger nonprofits are structured as multiple entities, with a parent organization and affiliate organizations filing separately with the IRS. While there are valid reasons for structuring an organization like this, detailed disclosures are required to understand how the impact of the organization relates to the financial input to the parent vs. affiliates.
  • Multiple Programs Provided. Many nonprofits deliver a variety of programs or operate in several different countries. If this is the case, in order to calculate cost per beneficiary, the nonprofit must disclose how much funding is spent on each program and how many beneficiaries each program serves. Also, because the mix of services provided by a nonprofit may change over time, it is important to track cost per beneficiary on a per program basis.
  • Program Revenues Generated by Beneficiaries. In some cases, beneficiaries of a nonprofit generate significant income for the organization. For example, Delancey Street Foundation's vocational training program participants are directly responsible for income generated by the nonprofit's social enterprises. This can significantly offset the numerator of the cost per beneficiary calculation.
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Perla Ni Joins NPI Advisory Board

"Nonprofit Investor provides a valuable lens to how nonprofits are managed." - Perla Ni, CEO of GreatNonprofits and Advisor to NPI

Perla has executive experience in corporate, academic and nonprofit sectors. Perla was the founder and former publisher of the Stanford Social Innovation Review, the leading journal on nonprofit management and philanthropy.

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Recognition at Entrepreneur Challenge

Nonprofit Investor recently participated in the TAP-NY Entrepreneur Challenge and Competition. Out of over 40 submissions, NPI advanced through three rounds of competition and presented to a panel of distinguished judges as part of the Top 6. Judge Andrew Yang, Founder and President of Venture for America and former CEO and President of Manhattan GMAT "applauded [Nonprofit Investor's] selfless endeavor and reminded the audience that nonprofit organizations face steep and treacherous obstacles that most people don’t recognize. Andrew ... created an additional $1,000 prize to help [Nonprofit Investor] along [their] altruistic mission."

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Obtaining 501(c)(3) Tax-Exempt Status

Nonprofit Investor recently received tax-exempt charity status from the IRS under section 501(c)(3) of the Internal Revenue Code. Does 501(c)(3) status in itself mean that NPI is a legitimate nonprofit? No.

NPI submitted an application package to the IRS and was determined to qualify as a tax-exempt charity. Because the IRS does not audit every charity and does not perform thorough due diligence on every charity, the responsibility falls on the entire philanthropic ecosystem to bring transparency and accountability to all charities.

The IRS approves somewhere between 69% and 98% of applications for 501(c)(3) status (98% for all instances where a decision is rendered, 69% when withdrawn applications are included). Section 501(c)(3) of the Internal Revenue Code is conducive to the constitutionally protected freedom of association. However, it is important that this system is balanced with scrutiny not provided for by the IRS.

In 2012, the White House Office of Management and Budget estimates that contributions to nonprofits will result in $48 billion of foregone tax revenue. If a charity fraudulently uses its funds, it does so at the expense of taxpayers as well as potential beneficiaries. The United States is a unique environment for individuals to effectively donate their funds, time and skills to causes they care about - let's make sure we take the further step of ensuring that the best organizations thrive and that frauds are exposed.

View NPI's IRS Determination Letter

Sources:
"Anything Goes: Approval of Nonprofit Status by the IRS"
"Setting the Record Straight - Not Everything Goes"
"Analytical Perspectives: Budget of the U.S. Government Fiscal Year 2011"

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NPI Research: Books for Africa (HOLD Rating)

Books for Africa (“BFA”) is the largest shipper of donated text and library books to the African continent, shipping over 23 million books to 45 African countries since 1988.

While BFA enjoys scale benefits of distribution, material inconsistencies in key metrics such as cost per book shipped and shipping cost per book diminish the credibility of reported information.

Read the full report here: Books for Africa.org (HOLD Rating)

Craig Newmark on "Help finding good effective nonprofits"

Aside from being the founder of Craigslist, Craig Newmark is very involved in social issues (which I suppose is a category you could put Craigslist itself in).

Here is a post from him on resources currently available to help find effective nonprofits: Google+ Craig Newmark Post

I also replied with some of my thoughts on the existing approaches out there.