"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:
- 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.
- 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.
- 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.