Charity Navigator (CN), the nation’s largest and most utilized evaluator of charities, has recently made updates to its rating system in order to more accurately describe a charity’s financial performance. The new rating system launched Wednesday, June 1.  Their mission is to educate donors about intelligent giving. They rate 501c(3) organizations on a four-star rating system that examines two broad areas of a charity’s performance: financial health and accountability and transparency.  The changes in rating methodology, characterized as CN 2.1, fall under the financial health category.  The way CN rates accountability and transparency will remain the same.

If you are in the group that doesn’t think the charity navigator rating system is a big deal, think again.  CN had over nine million visits to its website in 2015 and rates approximately 8,000 charities annually.  As I tell my clients: You don’t choose Charity Navigator. Charity Navigator chooses you.  So is your organization ready?

CN 2.1
Prior to this change, charities were rated on seven metrics: program expenses, administrative expenses, fundraising expenses, fundraising efficiency, primary revenue growth, primary expense growth, and working capital ratio.  All these financial measures are calculated using an organization’s Form 990 filed with the IRS.  The new rating system changes the following:

  • No longer measures primary revenue growth.
  • Removes the deficit adjustment.
  • Adds new financial capacity metric: ratio of a charity’s liabilities to assets.
  • Three year averages will now be used for the following metrics: program expenses, administration expenses, fundraising expenses, fundraising efficiency, and working capital ratio. Prior to the changes, those metrics were determined by using the most recent fiscal year.
  • New scoring for the percentage spent on programs and services.

According to CN’s website, these changes resulted in 27% of the 8,000 rated charities receiving a new star rating. Approximately 19% received a one-star increase, and about 8% received a one-star decline.

Rated Organizations
If your organization is a rated agency, CN has already notified you of your new star rating.  However, there are ways to improve your rating, particularly through the accountability and transparency metrics. Accountability and transparency are rated by using data taken from the Form 990 and by reviewing an organization’s website. If you’re not diligent in reviewing your 990 or you don’t pay close attention to the information available on your website, you could easily lose points and receive a lesser score.

There are 17 metrics CN uses to value accountability and transparency, and each charity begins with a base of 100 points for the accountability and transparency metrics.  If certain criteria is not answered on the 990 and/or your website is lacking certain information, points are deducted from the total base score of 100 points, lowering your overall star rating.

My experience has shown that some of these questions are not marked clearly on the 990, so it is important to double-check these areas.  If your organization is missing a policy or not publishing key items on its website, these are easy fixes and are easy ways to boost your score.

Before changing anything, you should first review how your organization scored on all accountability and transparency metrics by going to the CN website and looking at your results in each category. Then, correct the areas where you received a low score.

Unrated Organizations
If your organization is currently not being rated by CN, this is your opportunity to calculate what your star rating would be if measured against their metrics.  These metrics are what donors are using to evaluate and compare your organization to other similar organizations.  Many of these metrics are also used by funding sources to look for fiscally sound and properly governed organizations.  Use this information to your advantage to strengthen your organization’s weaker areas.

Head to the CN website to find out more information regarding the specific calculations and methodology; or contact me at lag@barneswendling.com, and I’ll assist you in calculating your organization’s star rating.