This page provides a guide to how we use the public financial information of a charity (generally available via the IRS Form 990 on GuideStar) to get at certain questions relevant to donors. We believe that there are definite limits to how much can be learned from the 990 Form - we ultimately wish to focus on lives changed, not dollars spent - but do find this information useful for certain contained questions.
Table of Contents
- Questions for which we feel public financial information is relevant
- Metrics we use to answer these questions
- Donated supplies adjustment
Questions for which we feel public financial information is relevant
- How much weight does the organization place on its different programs? Which programs are growing and which are shrinking?
- Does the organization have room to continue expanding its programs?
- Is the organization taking in more than it can spend? Is it spending more than it can bring in?
- Does the organization spend excessive amounts on overhead?
Metrics we use to answer these questions
Revenue and expense growth over time
We chart revenues and expenses over time, going back as far as we can access them.
Both revenues and expenses are subject to a "donated supplies adjustment" (more below). Over the last three years, we've focused on these main points:
- If revenues have greatly exceeded expenses, we expect expenses to be growing faster than revenues; otherwise we worry that the organization is taking in more than it can spend.
- If expenses have greatly exceeded revenues, we expect revenues to be growing faster than expenses; otherwise we worry that the organization is spending more than it can support.
- If expenses are stagnant over time, we worry about the organization's ability to continue expanding its programs.
Assets-to-expenses ratio over time
We chart the ratio between total assets and annual expenses, going as far back as we can access them.
Expenses are subject to a "donated supplies adjustment" (more below). The result is a number that tells us approximately how many years the organization could continue to operate if revenue were to cease.
- If a charity does not have enough assets to last 6 months without revenue, we worry that it does not have a stable enough financial situation to be a dependable steward of a donation.
- If a charity consistently has more than enough assets to last 2 years without revenue, we wonder why it does not spend its money faster - specifically, we wonder whether there are obstacles to useful expansion other than money, in which case a donation would not be as effective.
Expenses by program area over time
We chart expenses by program over time, going back as far as we can access them.
We aim to show the weight of expenses for each program that we analyze, but sometimes the data we have limits the level of breakdown we can provide. (When necessary we use IRS-reported program categories, though these often provide little detail).
We prefer to see larger expenses and/or expense growth in the programs we have confidence in.
Expenses by IRS-reported category: administration, overhead, and program expense over time
We chart expenses by IRS designations "Administrative expenses," "Fundraising expenses," and "Program expenses", going as far back as we can access them.
If non-program expenses total over 50% of total expenses, we worry that the organization exists more to pay salaries than to provide services. We believe that reading any more into this metric is a mistake; more on this topic here.
Donated supplies adjustment
Many charities receive significant donations of supplies (such as medicine), which they then use in their programs. Such donations are unlikely to be fungible with other funds, and are therefore largely irrelevant to the questions above. For example, nearly half the expenses of the Carter Center are in the form of donated supplies used in health programs. Including these expenses in our calculations would a) exaggerate the weight that health programs have in the Carter Center's overall allocation b) cause understating in the Carter Center's "overhead expenses" as a percentage of its total and c) cause understating in how many years its assets would allow it to operate.
Not all "in-kind donations" necessarily fall in this category. Some may be sold, netting funds that are fungible with other funds. When there is a particularly large line item under "in-kind donations", whose description implies that it is describing donated supplies, we treat this figure as a proxy for "donated supplies" and subtract it from both revenue and expenses for all relevant calculations.