It’s always been vital for nonprofit organizations to be fiscally responsible, but in recent years, being transparent about financial performance has become just as important. Donors, the media, and other key stakeholders are increasingly looking for objective assessments of an organization’s performance.
No metric has been more important than the score assigned to your nonprofit by Charity Navigator. Every 501(c)(3) organization with gross receipts of over $50,000 receives a charity navigator score each year, but few realize the importance of their score.
Your charity navigator score essentially serves as a summary of how well your organization uses donations and public funds to advance your mission. Donors prioritize giving to nonprofit organizations with higher scores. If your score drops too low, your organization may struggle to attract the funding required to remain operational.
Individuals are being more judgemental about where they donate, and it’s no longer good enough to survive on the goodwill of donors––you need a compelling reason for donors to give to your nonprofit.
This guide outlines exactly how your charity navigator score is determined, explores why the score is so important to the success of your organization and introduces strategies you can adopt to start improving your nonprofit’s score.
A charity navigator is a score awarded annually by Charity Navigator that evaluates the overall effectiveness of a nonprofit. Charity Navigator is an independent industry watchdog. All scores are calculated using the same algorithm, which is made up of two key elements: the financial score and the accountability and transparency score.
The data used to calculate an organization’s score is taken primarily from the organization’s IRS Form 990. This data is used to produce a score out of 100, with corresponding star ratings. For nonprofits, the goal is to obtain a four-star overall rating, equivalent to a score of 90 or above.
Let’s take a closer look at how the two key elements of the score are calculated.
The financial score is composed of several factors related to the overall financial health of your nonprofit and is calculated using data from the last three years. There are seven metrics in all, organized into two categories: financial efficiency and financial capacity.
The first four metrics that contribute to a nonprofit’s overall financial score assess how well a nonprofit allocates funds. These four metrics are:
Three additional metrics evaluate the nonprofit’s long-term fiscal viability, assessing how well-positioned an organization is to sustainably execute its mission. These metrics are:
An organization’s accountability and transparency score evaluates internal governance. In all, 17 variables make up this score. The data used to calculate this score is taken both from Form 990 and the organization’s website.
To achieve a high accountability and transparency score, nonprofits must commit to an open, honest culture. There are various ways to do this, from maintaining an independent board to submitting audited financials approved by an independent accounting firm. The nonprofit should maintain clearly documented, publicly available governance policies that define the management of topics such as conflict of interests, whistleblowers, and record retention.
Improving this score often requires nonprofits to make significant changes to existing internal governance protocols. This isn’t a light undertaking, and it’s always optimal to collaborate with an experienced nonprofit advisory firm to ensure a successful transition.
A strong charity navigator score is fundamental to the long-term success of any nonprofit. It shapes the nonprofit’s ability to attract donations, execute its long-term vision, and ultimately make a difference in the world.
Bettering your organization’s score takes a lot of work and there are no shortcuts to an improved score. Achieving a four-star rating requires a commitment to significantly improving the way your arts and culture organization operates.
Perhaps the most important step that nonprofit organizations can take to improve their charity navigator scores is to reconsider the way they file their Form 990. Often, Form 990 is viewed as a late-stage filing––an unimportant tax document that’s just checking a box. But in reality, Form 990 represents an invaluable opportunity for nonprofits to market themselves.
Form 990 is much more than a tax filing obligation. Instead, consider it a platform to communicate the good your nonprofit does in your community and position your organization for future growth.
The work you put into Form 990 directly impacts your charity navigator score, and in turn, the long-term sustainability of your organization. It’s incumbent for nonprofit leaders to capitalize on the opportunity Form 990 affords to weave a compelling narrative about the success of the organization.
Thinking of your Form 990 filing as a marketing opportunity allows your accounting team to review the form’s various disclosures anew. For instance, Part III of the form allows the organization to communicate the impact the organization had on their community during the year. This is a great opportunity for us to evaluate what accomplishments were made and struggles were overcome during the year, while infusing quantifiable metrics on the organization’s reach and impact in the community to assist the reader.
Another disclosure to be mindful of is if your organization does not have a written conflict of interest policy. While the organization may be operating in the interest of the mission and the community with their decision making, a reader of the form may interpret the lack of a policy to be an opportunity for misuse of donor funds. However, the establishment of an official policy and disclosure of the policy on the Form 990 strengthens the internal governance of the organization and trust that a donor’s funds will go towards the intended purpose.
Strengthening the financial position of the Form 990 is paramount to increasing your CN score. One way to improve your financial score is to evaluate the breakout of functional expenses in the return. A common misconception is to lump all of your expenses into the program expense activity, but this is actually a misrepresentation of the organization’s activities during the year. A reader understands that a portion of your officer’s time will be spent on management activities. Additionally, readers hope that fundraising efforts are being made to secure future donations.
Effectively improving your score requires partnering with accounting and advisory partners who truly understand the fundamental importance of Form 990 to your nonprofit. Working with the right firm can be a game changer, not only for your charity navigator score but also for the wider financial infrastructure of your nonprofit.
An effective nonprofit accounting firm will help you implement best practices used by leading nonprofits in your space. With their guidance, your nonprofit will be able to adopt financial standards and governance protocols that improve your charity navigator score.
At Smith and Howard, our specialized nonprofit accounting team has extensive experience partnering with arts and culture organizations, particularly in preparing Form 990. Our CPAs deeply understand the importance of charity navigator scores and serve as long-term partners to help you grow your score over time. Interested in learning more? Contact us today.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR
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