Navigating Charity Navigator

Since its founding in 2001, Charity Navigator has grown to be one of the most widely recognized rating agencies for not-for-profit organizations. Not-for-profits that rely on charitable contributions can enhance their ability to attract donors by focusing on achieving high Charity Navigator ratings.

U.S.-based not-for-profits that have been in existence at least seven years and meet the following requirements are eligible to be rated: 501(c)(3) status with annual Form 990 filings; revenues of $1 million or more and public support of $500,000 or more for two consecutive years; and administrative and fundraising expenses of at least 1% each of total expenses for three consecutive years.

Not-for-profits rated by Charity Navigator are classified into 11 broad categories, and then 38 causes within those categories. The rating system is tailored to the category and cause classification to ensure that differences among subsectors/missions of not-for-profits are considered. 

Charity Navigator uses a four-star rating system that is based on objective input from two sources: the Form 990 and the not-for-profit’s website. Not-for-profits are rated in two areas: financial health and accountability and transparency. Each area is assigned a score based on a 100-point scale and the scores are then combined to determine an overall score. A score of 90 or better results in four stars, 80-90, three stars, 70-80, two stars, and 55-70, one star.

The financial health score uses Form 990 data to measure the following:

• Program, administration and fundraising expenses as percentages of total expenses over a three-year period (with an evaluation of joint cost allocation if applicable)
• Fundraising efficiency (the cost to raise $1) over a three-year period
• Program expense growth over a four-year period
• Working capital ratio over a three-year period
• Liabilities to assets ratio as of the most recent balance sheet date

Each ratio is assigned a point value based on a conversion table which is available on the Charity Navigator website. These are accumulated for an overall financial health score.

Accountability and transparency is evaluated based on criteria from the Form 990 and the not-for-profit’s website, as shown below: 

Form 990 criteria

• Adequate number of independent board members
• No material diversion/adequate explanation of material diversion of assets
• Audited or reviewed financial statements
• No loans with related parties
• Maintains board meeting minutes
• Provides form 990 to board before filing
• Maintains conflict of interest policy, whistleblower policy, document retention and destruction policy
• CEO name and compensation is listed
• Process for determining CEO compensation includes comparability evaluation and approval by independent board members
• Board member names are listed and board members are not compensated in their roles as board members

Website criteria

• Adequacy of donor privacy policy
• Board members and key staff listed
• Audited financial statements and Form 990 are accessible from the website

The rating for accountability and transparency starts with a score of 100 and points are deducted based on a table for items not meeting the required criteria.

Not-for-profits that wish to achieve and maintain high ratings from Charity Navigator should recognize that achieving an accountability and transparency score of 100 is within their control. The Charity Navigator website provides specific details of point reductions. Ensuring that all criteria meet the Charity Navigator requirements will help ensure a perfect score for accountability and transparency. 

The financial health score is a more significant challenge, as financial results are not completely predictable. Focusing on achieving the required percentages and ratios when budgeting and monitoring results throughout the year can help to achieve good outcomes.

Charity Navigator does have an appeal process for organizations that believe their specific circumstances need further consideration to result in a representative rating. Your Baker Tilly professional can help you understand the Charity Navigator methodology and help you navigate to achieve your best score. 

For more information on this topic or to learn how Baker Tilly's not-for-profit specialists can help, contact our team.