Picking a charity is tough, simply because it is difficult for donors to evaluate a charity before giving it their money.
The problem is that nonprofits don't have a standardized way to measure outcomes. A business can count profits, but how does a nonprofit measure how much good it actually does?
Typical markers of quality that donors look for include how many people a charity serves, the number of and size of grants awarded to the charity from reputable foundations, awards received, and whether the charity is treating the symptoms of a social need or addressing its root causes.
However, donors who are looking for hard and fast statistical measurements to guide their charitable decisions are typically left with measuring "efficiency." That usually breaks down to looking at a nonprofit's financial information to make sure that most of its funds go to run its programs rather than overhead (indirect costs).
Most donors would prefer to feed more children than to fund the agency's utilities. Donors also want to see that a charity's fundraising costs are reasonable. Obviously, if a charity raises $75,000 but spends $50,000 on fundraising costs, that is not an efficient charity.
Charity watchdogs, such as CharityNavigator, have become widely used by donors to evaluate charities. Efficiency, or the ratio of program expense to overhead expense, figures large in the ratings given to charities by such organizations, although Charity Navigator has recently changed its ratings to include "transparency." Transparency simply means that a charity makes it easy for donors to learn about its finances and does a good job of measuring its impact.
Just depending on "efficiency" sometimes results in some very fine nonprofits being graded lower than they probably deserve due to anomalies in their financials for a particular period of time, or simply because a one-size-fits-all method just doesn't work for some organizations.
Also, donors should not shy away completely from helping an excellent charity with its overhead costs. Overhead is not the dirty word it once was, as long as the charity is doing a good job of meeting its mission. Some foundations have even, recently, begun providing grants for some of the costs of actually running a charity's operations. It costs to turn the lights on and buy computers.
"...low overhead doesn't necessarily mean an organization is awesome at fighting poverty, or that its turnover is low and its people productive. And it certainly doesn't guarantee that the group is spending wisely."
Lublin makes good points, and donors need to be aware of the strengths and possible problems with ratings systems that depend too heavily on financial information.
You can also choose charities by letting someone else do it. GiveWell.net, for instance, pools contributions from many people and gives grants to charities that meet its stringent requirements. GiveWell is not just another United Way, however. It looks for innovative organizations that are doing things in a new way, and that measure their results. Donors can pick the charities in GiveWell's portfolio that appeal to their interests. You may be surprised at how few charities GiveWell recommends.
Another way to evaluate a nonprofit is through what its supporters and clients say about it. That is what GreatNonprofits tries to do. It has applied the review system from commerce (think of the reviews at Amazon.com for instance) to nonprofits. GreatNonprofits provides a platform where users can provide first hand stories about the nonprofits they support or benefit from.
GreatNonprofits provides a more human and qualitative approach to evaluating nonprofit organizations, one that can be very useful. Donors will want to consider both efficiency and user reviews when thinking about which nonprofits they want to support. GreatNonprofits is also now integrated with Charity Navigator and GuideStar, which lists all of the IRS approved, 501(c)(3) charities along with their recent financial statements known as 990s.
The bottom line is that it is not a simple matter to pick a charity that deserves our donations. We need to do our research and include a variety of sources before making our decisions.
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