7 Ways to Check Out a Charity

Editor's note: This article was updated in December 2009.

A 5.7% drop in donations over a recent 12-month period -- the biggest decline in more than 50 years -- means that charities need your money now more than ever. It also means that you need to be sure a charity wrings the most possible good out of your gift.

Here are seven measures of a charity’s ability to deliver on your good intentions:

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Efficiency. Expect the charity to devote at least 75% of its budget to programs, with the remaining 25% going to administrative costs and fund-raising. Seven out of ten charities meet or exceed the 75% standard, says Matt Viola, of Charity Navigator, a charity evaluator. Those that allocate more than 25% on overhead are wasting precious resources.

Concrete results. Check the mission statement on the organization’s Web site to see that the group has clear goals and the ability to execute them. For instance, if the group claims to protect land, find out how much land it protected in a given period. Some nonprofits muddle along for years without making a dent in their core mission or achieving long-term results. If you have questions about a charity’s effectiveness, call the staff and invite them to respond.

Assets. Charities must file Form 990 with the IRS annually. Look at the line that indicates whether the charity has ended the year with positive or negative assets. (If you can’t find the tax form on the charity’s Web site, call and ask for a copy.) Ending one year in negative territory doesn’t necessarily mean the organization is going under, says Laurie Styron, of the American Institute of Philanthropy, which rates charities. But if the organization comes up short for several years in a row, she says, “that’s an indication it could be winding down. Your contribution could be used to pay legal fees or creditors rather than the programs you are intending to support.”

Capital reserves. Tough as it may be for organizations to maintain reserves when times are tight, “it’s even more critical now because they might need that capital,” says Viola. To keep the lights on while donations are down, a charity should have at least six months’ to a year’s worth of working capital, expressed as “working capital ratio” at Charitynavigator.org.

Auditor’s commentary. Often attached to the charity’s annual report, the statement includes the auditor’s assessment of the charity’s health. Look for the word unqualified, which indicates that the auditor has signed off on the charity’s finances without reservation. Qualified means there is some issue, “and the auditor will specifically state what it is,” says Styron -- perhaps the loss of a major donor or a precipitous drop in contributions.

Executive compensation. A salary of $158,000 represents the average annual pay for executives of medium-size to large charitable organizations, according to a 2009 survey by Charitynavigator.org. The executive of a complex, multi-million-dollar charity might justifiably command that amount or more, says Viola; not so much the CEO of a group that operates on $500,000 or less. “That’s a big part of the budget.”

Complaints. Most states not only require registration for charities that solicit within their borders but also track complaints against them. (Here's a list of the state agencies that regulate charities.) If your state does not require registration, look for information in states that do, such as New York, which provides a searchable database at www.charitiesnys.com. The Better Business Bureau also tracks complaints against charities.