Wednesday, December 05, 2007

Business of charities

The end of the year is always the most important in terms of charitable giving, so I think I'll take a moment to look at what makes a charity worth giving to. First, you need to look at a charity qualitatively and then quantitatively. In other words, no matter how efficient a charity is financially, there's no point in giving to it if you don't support the cause or the way the charity pursues it. For instance, I'm fairly ambivalent about animal causes (I think we should focus on people first) so I wouldn't consider giving to one. And I don't much like PETA's tactics, so I definitely would avoid them even though they are fairly efficient about getting money to their cause.

I am interested in International Christian organizations, such as Samaritan's Purse. The link is to Charity Navigator, which rates the financial statements of charities. More about that in a minute. Two of my favorite programs are Operation Christmas Child, which let's donors give a shoe box of gifts to a poor child, and community development programs, that help people become self-sufficient. Qualitatively, it's a great organization, but what about the finances?

From a financial perspective, a charity isn't much different than a for-profit business. There are revenues, expenses, and a bottom line—only the bottom line is used to support some cause rather than owners or shareholders. The first expense, is fundraising, which corresponds to the cost of goods and services in a traditional business. Charity Navigator looks at this expense in two ways: as a percentage of expenses and as a percentage of revenues. Normally these are pretty close to the same ratio, but some charities spend more or less then they take in which causes one ratio to be higher than the other. In both cases the better charities will spend less on fundraising. Samaritan's Purse spends about 4¢ to raise a dollar of support and 6% of its expenses are related to fundraising. An excess of $67,924,383 accounts for the discrepancy.

It's important to compare apples to apples when you look at finances. For instance, every time there is a disaster in the news, the Red Cross gets a ton of free advertising. Meanwhile, my wife is the fundraising coordinator for a small pregnancy clinic that gets no government support. They hold a fundraising banquet every year that generates significant donations, but also costs a fair amount to put on. Comparing those charities by any objective measure isn't really sensible. In general, bigger charities and those with notable brands do better than others.

The next major expense is Administrative, which most correlates with operating expenses in the corporate world. As a percentage of expenses, the smaller the better. Samaritan's Purse spends about 5% on administering its programs, which means (after backing out fundraising) 89% of its expenses are directly related to programs. As a result, it has an excellent efficiency rating from Charity Navigator. I should point out that these measures of efficiency are closely tied and programs could be rated on what percentage of expenses are directly linked to programs with out losing too much information.

Besides efficiency, Charity Navigator also quantifies what it calls capacity based on revenue growth, program expenses growth, and working capital ratio. Roughly speaking, the faster a charity grows and the larger its ready reserve, the more people it will be able to help in the future. Again, its important to consider the context of a charity. Larger charities tend to have advantages in terms of growth and reserves. Samaritan's Purse's revenue has grown 24%, its programs 16% and it has about 5 months of working capital saved up for emergencies.

Personally, I like to donate to small charities that I have some personal connection to. For instance, my wife and I support several missionaries who are our friends. These small gifts have a much bigger impact than if we gave to larger organizations. We also think about how to get our contribution to the organizations we support as efficiently as possible. Usually, writing a check will help more than giving a credit card number to a telemarketer. Finally, we don't give to every charity that sounds good. Concentration helps keep costs down and increases the impact we can make.

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