Money Matters: How to Spot an Efficient Charity

Bryan ROctober 1st, 2007
By: Bryan R

Charities, non-government organizations (NGOs) and non-profits are an important part of society. Between food aid, housing assistance, job training, environmental and social advocacy, etc., these organizations service all sectors of society, rich and poor alike. At its heart, Chef Seattle is a social venture organization and supporting these charities are an important part of our mission of promoting and improving our local community.

When we think of a traditional business, we consider it successful when it provides a valuable product or service that it can sell for a profit. To a reasonable extent, we consider more successful businesses to be those with larger profit margins. By definition, charities are not generating a profit so we can't evaluate their success the same way. Like businesses, however, charities have to report their income and expenditures to the IRS (via the 990 form). These tax forms carefully report how much income the organization receives and how much the organization spends. The expenditures of a charity are broken down into several categories: program support (money spent to achieve the mission of the organization), management (administration, salaries) and fund raising expenses (money spent to generate future revenue).

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Charities are a vital part of our society

The goal of any charity should be to reasonably maximize the amount of money it spends on program support. A charity is considered "efficient" when a fair majority of its incoming funds are spent on program support. Based on our research, a good rule of thumb is that charities should dedicate at least 75% of their income towards program support (while ideally this figure should be higher). A 75% efficiency rating means that seventy-five cents of every dollar donated goes towards supporting the charity’s cause.

There are certain charities that perform fiscally fantastic. Well-known organizations such as the American Red Cross, C.A.R.E., and Conservation International have well managed budgets that are all over 85% efficient and deal with sums of money ranging from tens of millions of dollars (Conservation International) to several billion dollars (American Red Cross).

On the other hand, certain non-profits struggle to manage their funds efficiently. For example, the American Cancer Society, which manages some $800 million in yearly donations, is running at 69% efficiency. Other charities such as the worker’s rights charity, Jobs with Justice, or the Boys Choir of Harlem manage relatively large budgets (~$2 million) but are less than 40% efficient.

Charity efficiency is an important metric when considering which charities to support. However, holding all charities to the exact same standard can be unfair. For example, if a charity is new or is pushing a relativity unknown cause, they may need to spend a larger fraction of their budget on fundraising than compared to a more established, popular group. As a result, the new/unknown charity may have a lower efficiency since they must allocate a smaller portion of their budget towards program support. Also, certain charities, such as land trusts, have highly variable yearly income and as a result, their efficiency can vary dramatically from year to year. Another factor that may lower a charity’s efficiency are the salaries of its employees. Although it’s generally accepted that employees working in the non-profit sector are probably going to be making a little less dough, when wages are too low it can result in high turnover and difficulties in attracting highly qualified candidates. So while it’s preferable to support charities that spend the bulk of their money on program support, charities that underpay their employees also experience hardships that can undermine program support.

Lastly, efficient fund spending doesn’t necessarily imply effective fund spending. For example, abstinence-only education has been suggested as one method of curbing teenage pregnancy rates. A charity could take this approach to the problem of teenage pregnancy and use donated funds highly efficiently (due to low overhead, modest salaries for their employees, etc.). However, this money may not have been spent very effectively since studies suggest abstinence-only programs have a minimal impact on teen pregnancy rates. Determining effective versus efficient spending, however, can be pretty challenging and requires careful consideration.

At the Chef Seattle, we aim to support the charities that have valuable missions and are running efficiently. As we research various local charities, we will make sure to publish and update what we find and keep cabal members in the loop.

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