Monday, July 22, 2013

Small nonprofits and charity rating organizations

Recently, the so-called "Big Three" charity rating or reporting organizations  (GuideStar, Charity Navigator, and the BBB Wise Giving Alliance) have been in the news because they have publicly acknowledged that using a percentage ranking, i.e. a ratio of dollars raised to administrative costs may not be the best way to determine the worthiness of a charity. That prompted emails in my inbox that usually started out  with some variation of " I need help getting good ratings from (insert group here)".

There is no doubt that being rated could improve your visibility, and the number one complaint of small NPO's is that they feel invisible to, or passed over by, possible donors. That's understandable, given the sheer volume of nonprofits. On its website "About" page, states that they " …gather and disseminate information about every single IRS-registered nonprofit  organization", and they put that figure at 1.8 million.   And that doesn't even count the tens of thousands of organizations that are only state-registered.
In actual fact, many nonprofits can't receive a rating from these or many other reviewing groups. They are simply too small or too new to be rated.

These rating organizations came into being to attempt to give donors some sort of benchmark to assure that their dollars weren't going to be misused by a charity. Some, such as Charity Watch actually assign a letter grade to nonprofits. Some, such as GuideStar, simply provide a central location to access basic information about a charity you may be interested in and leave the evaluation up to you.
Typically, the reporting organization has a criteria that they follow when listing a charity on their website or in their database, and they usually require you to have at least one long form 990 form on file with the IRS. That's because they arrive at their rankings by applying simple math to your financial reporting in that form.

Some state up front that you must receive a certain total amount of public support. Charity Watch  ( states that they don't review nonprofits with less than one million dollars in donations,  and they don't report on report on churches, synagogues, mosques, political action committees (PAC's), fraternal clubs, colleges, or local institutions such as hospitals and museums.

 Other sites, such as GuideStar may simply allow you to update and/or complete your information on their website and rank you according to the completeness of  that information. However, since the 990 is typically the most common way that donors can view your reported income and expenses, not having that long form 990 is going to hurt you.

If you haven't reached the magic $50,000 mark in donations yet, you don't have to file the long form, and most small or new NPOs use the e-postcard or 990-N, which has no financial information whatsoever. Therefore, there is nothing for anyone to review. Any organization is allowed to file the longer 990 forms, but few small organizations can afford the accounting costs so they seldom do so.

My advice to any nonprofit that has received less than $50,000 in public support and has limited assets is to focus on your local reputation. Note:  income unrelated to your charitable purposes is another category. We are talking only talking about public support income directly related to your charitable mission here.

In the case of simple listing organizations such as GuideStar, you can review the posted information and update it if you think it will help your credibility. Just be aware that not having some of the information may result in your "star" rating being low, and that could be worse than not being listed at all.

To improve your visibility, you might want to join local business groups or the local BBB. Have financial statements available to produce on request, and keep the community informed by having a visible presence, such as events or at least through press releases to your local area media when something noteworthy happens. And of course, if you want to and can afford it, you can always file the applicable long form.

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