When it comes to charitable donations, donors often wonder, where does my donation go? Ratios are used to answer this question.
Here are 4 common ratios that can be used to understand how a charity is utilizing your donations.
Overhead Ratio
This is the most used ratio in the nonprofit industry. It compares the total administrative expenses to the total income and determines the charities ability to provide for its programs. This ratio can also give the wrong impression to donors who expect their donation to solely support the charities programs.
However, keep in mind that a charity cannot operate without the overhead. A charity is able to make an impact because regular people have made it their mission to make it happen. This can include:
Developing and maintaining programs
Fundraising
Raising public awareness
Accounting and taxes
Following local, state, federal, and international laws
Operating Reserve
How long can the charity operate if there was no new income? A month or two? A year? That's what this ratio measures. CBIZ, a leader in professional accounting and advisory services, recommends a minimum of 3 months operating reserve.
Fundraising Efficiency
For every dollar raised, how much is spent on raising it? The Better Business Bureau Wise Giving Alliance recommends no more than 35% of each dollar raised should be spent on raising it.
Program Efficiency
In addition, to find out how much a charity spends on their programs, compare the total program expenses to the total expenses. Every year, Forbes compiles the top 100 charities and publishes a program efficiency ratio. For example, in 2017, every organization was over 70%.
Program Growth
Occasionally, an increase of program expenses isn't necessarily a bad thing. The programs growing! While growth is every charities goal, sustainable growth is key. Charity Navigator measures this by comparing a charities program expense growth over the past 3 years.
In the End
When comparing the ratios for multiple charitable organizations, do so with a grain of salt. Keep in mind that the size, scope, and mission of an organization impacts the ratios. For example, the overhead ratio will vary wildly for a long-standing charitable hospital in an affluent area vs. a newly formed food pantry in a low-income area. Regardless, it is a charities duty to be conscientious stewards of the precious resources they are given.
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