This is part of The Globe and Mail's in-depth look at the evolution of philanthropy. Read more from the series here.
You've decided which causes you'd like to contribute to, and you've worked out how much you can give. But as you plan your strategic giving for the year , how do you determine which charities will make the best use of your donations?
Before you write your cheque, Sandra Miniutti, vice-president of marketing and chief financial officer of the U.S. charity evaluator Charity Navigator, suggests examining organizations, based on these key factors: financial health, accountability and transparency, and, most importantly, results. Is the charity accomplishing its mission?
Charity Navigator analyzes around 5,500 U.S. charities. In Canada, MoneySense magazine's Charity 100 rates the country's top 100 charities. Charity Intelligence Canada has researched around 350 charities over the past four to five years, and provides analyses on those it recommends online. (It will also soon launch an independent online guide that will allow donors to search for audited information on 100 major Canadian charities.)
While a charity's accomplishments are key to determining its effectiveness, Ms. Miniutti emphasizes that finances cannot be overlooked. "We maintain that a charity that has their financial house in order is going to be more effective in delivering those results," she says.
One way Charity Navigator determines a charity's financial health is by looking at whether it owes more than it owns, and whether its bills at year end are more than it can afford to pay.
Ms. Miniutti recommends looking at about three to five years' worth of an organization's finances. You should be able to find recent audited financial statements on its website, or you can request them.
Being in the red one year isn't necessarily a bad sign, she says. A charity may go into debt if it identifies a need it can immediately fulfill. Or, it may have a rare large expense, such as buying computers or other equipment that will help it become more efficient. But if you see a trend where the charity consistently owes more than it can pay, you may want to look elsewhere.
Another way to assess an organization's financial situation is to examine its "program cost coverage," which determines how much funding it needs. As Bri Trypuc, head of donor services at Toronto-based Charity Intelligence Canada (Ci), explains, program cost coverage is the ratio of a charity's funding reserves to its annual program costs. If that ratio is more than 100 per cent, the charity has more money than it needs to operate in a year.
"The startling thing that we found at Ci is that there's many charities that fundraise because they can, not because they need the money," Ms. Trypuc says, adding that these organizations may simply accumulate funds in their reserves.
If an organization's program cost coverage ratio falls within 25 and 100 per cent, your donation will most likely be used to deliver charitable works within a year. If it exceeds 100 per cent, you may want to consider a charity whose immediate needs are greater.
Experts also advise comparing the amount of money the organization spends on administrative and fundraising costs against its program costs. In general, Ms. Miniutti says, the most efficient charities spend 75 per cent of their money on programs, and 25 per cent on administration and fundraising.
ACCOUNTABILITY AND TRANSPARENCY
A lack of transparency or accountability regarding donor funds should automatically raise red flags, Ms. Trypuc says. While charities and not-for-profit organizations that are registered with the Canadian Revenue Agency must, by law, submit their financial information to the government agency, she says they are not legally required to give this information to the public. Still, you should be suspicious of a charity that hides its financials.
Annual reports should be readily available, and the organization's mission, its past year's accomplishments and informational materials should be clearly stated.
Any organization that is fundraising by seeking public donations should be registered by the Canadian Revenue Agency, Ms. Trypuc says. "Otherwise, it's just an independent person raising money and you'll never really be able to verify what you're doing with that money." Registered charities can issue tax receipts. Registered not-for-profit organizations cannot.
You can confirm that you are dealing with a registered charity by looking it up on the Canadian Revenue Agency's online Charities Listings site.
Be sure to check out the governance model. According to the Canadian Better Business Bureau, a charity's board of directors should have adequate oversight of the organization's operations and staff. It should include a minimum of five voting members, no more than 10 per cent of whom are compensated by the organization, and it should hold at least three evenly spaced meetings a year.
Its transactions should also be free of any material conflicts of interest on the part of staff or board members.
WHAT'S THE IMPACT?
It's ultimately up to you to judge whether a charity meets your expectations. Look at the annual reports and the results of its programs from previous years. Some donors may place greater importance on the number of people a charity has helped. Others may be more interested in the depth of help. Just because an organization has impacted only a small group of individuals does not mean it hasn't improved their lives significantly.
Be clear in your mind how you want your contribution to be used, says Marvi Ricker, vice-president and managing director of philanthropic services at BMO Harris Private Banking. This may not be critical for smaller spontaneous donations, but it is vital for larger philanthropic gifts. For example, she says, if you're donating $10,000 to a hospital and you want it to go toward purchasing equipment, make sure you designate the money for that purpose. You can later assess whether that equipment was bought and whether it is in use.
"You can't, after the fact, decide, 'Oh yes, the charity did a good job,' if you don't know how you're going to measure it," Ms. Ricker says.
Your involvement with a charity shouldn't end once you've made your donation. Many charities update their donors annually or throughout the year, and donors themselves should follow up periodically to ensure they want to continue their support.
If you want to be an effective donor, stay loyal to the charities you like. "Even if they have a bumpy year, stick with them," Ms. Miniutti says. "If they can count on you, they can become more effective and efficient over time."
You may decide that a charity is not for you after a year of giving, but if you did your research well, all is not likely lost, says Tom McCullough, who advises wealthy families as the president and CEO of Toronto's Northwood Family Office.
"It may take a few mistakes along the way. But even if a charity isn't a perfect fit, did somebody get helped out in the process? That's the best outcome."
With additional reporting by Tralee Pearce