Some non-profit organizations receive large donations of non-cash goods and services, which they are responsible for valuing. The dollar value a charity assigns to its non-cash donations is then mixed together with its cash revenue and expenses in its financial reporting. This often has the effect of making the nonprofit appear to be larger and operating more efficiently than it actually is. Accounting rules offer only very general guidance about how charities are required to value non-cash donations, and different charities often assign very different values to the same items. Such inconsistencies in the reporting make it difficult to compare the financial efficiency of different non-profit organizations.
For example: Charity A and Charity B both receive a donation of 100,000 pills from a pharmaceutical company on the same day this year. Charity A might decide that the pills are worth $3.00 each and add $300,000 to its financial statements for the year. Charity B might assign a more realistic value of $0.10 per pill, adding only $10,000 to its financial statements for the year. The financial reporting is impacted in the following way:
| Charity A | Charity B | |
|---|---|---|
| Cash Contributions: | $100,000 | $100,000 |
| Non-Cash Contributions: | 300,000 | 10,000 |
| Total Reported Contributions: | $400,000 | $110,000 |
As you can see, even though both charities raised $100,000 of cash contributions and received the exact amount and type of non-cash donations this year, Charity A appears to have raised nearly four times the amount of contributions Charity B has raised simply because Charity B valued its non-cash donations more honestly or conservatively. Now, say that both charities spent $20,000 on fundraising this year. The fundraising efficiency of each charity would appear to be:
| Charity A | Charity B | |
|---|---|---|
| Fundraising Expense: | $20,000 | $20,000 |
| Divided by Total Contributions: | $400,000 | $110,000 |
| Cost to Raise $100: | $5 | $18 |
As you can see, Charity A appears to have raised contributions much more efficiently than Charity B, simply because it chose to place a higher value on the non-cash donations it received. Charity B appears to be a less efficient fundraiser simply because it valued its non-cash donations more honestly or conservatively.
The same issue arises when calculating a charity's program percentage. Say both charities distributed all the pills they received by the end of the current year. The value of the pills would be reported as a program expense in the charities' financial statements. The program spending efficiency of each charity would appear to be:
| Charity A | Charity B | |
|---|---|---|
| Cash Program Expenses: | $80,000 | $80,000 |
| Non-Cash Program Expenses: | 300,000 | 10,000 |
| Equals Total Program Expenses: | $380,000 | $90,000 |
| Total Cash Expenses: | $100,000 | $100,000 |
| Non-Cash Program Expenses: | 300,000 | 10,000 |
| Equals Total Expenses: | $400,000 | $110,000 |
| Program Expense: | $380,000 | $90,000 |
| Divided by Total Expenses: | $400,000 | $110,000 |
| Program Spending Efficiency %: | 95% | 82% |
As you can see, Charity A appears to be extremely efficient, spending 95% of its budget on programs and only 5% on overhead. Charity B looks less efficient by comparison, spending only 82% of its budget on programs and 18% on overhead. Of course, in reality, Charity A is no more efficient than Charity B. It just appears to be spending more on programs because it was less conservative or realistic about the value of its non-cash donations.
Non-cash donations can be difficult to value and distort the calculation of how efficiently a charity raises and spends its cash donations. Both charities received the exact same type and amount of cash and non-cash donations, but because each charity valued them differently, one charity appears to be operating far more efficiently than the other. Charities have incentive to inflate the values they place on the non-cash donations they receive and distribute for this very reason. Charity marketing materials, annual reports, and "Impact" reports generally reflect only the most flatteringly framed information about a charity's in-kind goods and financial efficiency. In addition, the ratings published by charity trade associations and "big data" websites that claim to rate thousands and thousands of charities largely on the face value of what charities report about themselves rarely scrutinize audited data in a way that helps donors to understand how efficiently their cash donations will be spent.
CharityWatch "follows the cash" and generally excludes the value of in-kind goods and services from its calculations of Program % and Cost to Raise $100. Our ratings provide donors with a clear picture of how efficiently charities are using their cash donations. They also offer superior comparability of different charities than do other sources of information that do not separate charities' non-cash goods and services from their cash.
Bottom Line: Using cash efficiently and receiving and distributing donated goods and services efficiently are not mutually exclusive actions. Many of CharityWatch's Top-Rated charities are able to do both. A charity's use of cash and use of donated goods and services should be considered separately so that the latter do not obscure how efficiently it is really operating.
See our many articles on Donated Goods & Services for specific examples of the issues outlined above.