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Posted on May 23, 2015

Charity Ratings - Organization and Donor Effects

by Matthew Miller, CPA, Staff Associate

What goes into a rating? Charities, like debt instruments, are given ratings by different rating organizations. Each uses a separate formula for its rating, but three factors are apparent everywhere: how charities spend their money, protect donor privacy, and govern themselves.

Of the three major aspects, the financial component is the most scrutinized: what percentage of functional expenses are program expenses versus administrative and fundraising expenses? This ratio is important because it tells potential donors how much of each dollar they donate goes toward the purpose of the charity. It also shows how much is spent on fundraising for each dollar donated.

Why they matter. This may not be much of a factor for continuing donors. They know who you are, what you do, and how you do it, and they agree with it. That’s a big part of why they continue to donate. Ratings matter more to the new donors: those who are looking for a charity of which to be a part, or to be able to make some donations for tax purposes. If the proper research is done by potential donors, they’ll come across charity rating describing how the money they plan to donate is spent, and how their privacy will be protected.

In a hypothetical situation, a donor fully agrees with a charity’s mission and wants to donate. However, they see that this charity received a low rating due to a larger than average percentage of expenses of the administrative variety. They now have questions of whether or not to donate because their donation won’t be utilized as much as they had hoped. They may still donate, but it raises the question.

Conversely, a potential donor comes into his/her research with questions about a charity. A high rating could quash the questions and provoke a donation.

It’s important for organizations to monitor their spending habits and do comparisons across similar organizations, if possible. This can bring in potential donors without spending more on fundraising. It’s also important for potential donors to do their research before donating. That organization might have a great mission and goals, but will they spend as much of your donation on achieving that goal as you would like?

The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.