Charity Navigator Launches CN 2.1

The latest view on not-for-profit accounting issues

On June 1, Charity Navigator announced the launch of CN 2.1, an enhancement of their previous charity rating system CN 2.0. This includes several changes to the seven “Financial Health” rating metrics used to evaluate charities, and to help donors make wise decisions in choosing where to make their donations. Here are the primary changes that have occurred in the change from CN 2.0 to CN 2.1:

  • Primary revenue growth: Annualized growth in primary revenue from the most recent three to five years was included under CN 2.0. This has been removed from the CN 2.1 rating system. This seems to be a wise choice, as revenue growth does not necessarily demonstrate how impactful and efficient a nonprofit is with its resources.
  • Several metrics involving expenses have been modified to include the average expenses from the charity’s three most recent fiscal years, instead of only considering expenses from the most recent fiscal year. This should present a more accurate representation over time, as one year may be an anomaly. The change has been applied to program expenses, administration expenses, fundraising expenses, and the working capital ratio:

Program Expenses:
CN 2.0 Program Expenses ÷ Total Expenses
CN 2.1 Average Program Expenses ÷ Total Average Expenses

Administration Expenses:
CN 2.0 Administration Expenses ÷ Total Expenses
CN 2.1 Average Administration Expenses ÷ Total Average Expenses

Fundraising Expenses:
CN 2.0 Fundraising Expenses ÷ Total Expenses
CN 2.1 Average Fundraising Expenses ÷ Average Total Expenses

Working Capital Ratio:
CN 2.0 Working Capital ÷ Total Expenses
CN 2.1 Working Capital ÷ Average Total Expenses

  • Fundraising Efficiency: Similar to the changes in expense metrics, the calculation of fundraising efficiency has been changed from the single year calculation of fundraising expenses ÷ total contributions to the three year calculation of average fundraising expenses ÷ average total contributions. This should also present more accurate results as contributions may be solicited and received across different fiscal years.

The implementation of this new rating system resulted in 27% of the 8,000 charities rated by Charity Navigator receiving a new star rating. Nineteen percent increased by one star, while 8% decreased by one star. For more information on the rating changes, see the Charity Navigator website.

By Paul Biggs