How You Can Start and Operate a Soup Kitchen

Mission Possible: How You Can Start and Operate a Soup Kitchen

Pitfalls to Avoid in Determining Charities to Support

We are coming up to that time of the year when both your traditional and online mailboxes will be filled with appeals from local and national charities seeking your donations. If you are like me, you have a drawer somewhere in your house overflowing with low-cost give-away premiums — return address stickers, small “things to do” pads, and greeting cards that you received from nonprofits seeking your support.

If you do not have first-hand knowledge of the charity and the charity isn’t listed on one of the reputable charitable rating sites i.e., Charity Navigator, I suggest checking out their IRS Form 990 or 900-EZ, which must be filed by all charities with budgets over $25,000. These forms contain information on the charitable organizations’ incomes, reserves, salaries, and percentage of funds spent on programs.

In reviewing IRS forms don’t make the erroneous assumption that charities that spend the least on fundraising and administration are the best because they will have more funds for programs. Effective fundraising does not drain resources; it expands overall revenue, and requisite administrative infrastructure is required to support programs.

When Warren Buffett adds a stock to his portfolio, he looks for securities with prices that are unjustifiably low based on their intrinsic value. His investment methodology embraces whether the stock has consistently performed well (net income/shareholder revenue), has a high profit margin, and is trading at a discount based on its true value. His focus is never on intervening variables, like how much the company is spending on marketing or overhead.

Similarly, someone trying to determine whether they should donate to a particular charity should be looking critically at measures relating to the performance of the charity against other comparable charities (based on cost per unit of high-quality service). For example, a donor interested in improving urban education should compare the cost to graduating a student with comparable socio-economic characteristics among respective charities.

As a direct result of the increasing prominence of various online rating entities like Charity Navigator and GuideStar, an increasing number of donors are basing their charitable decisions on efficiency, effectiveness, and transparency. While these rating services are by no means perfect, they are far better than the way that many donors have traditionally picked the charities they support.

If you, like far too many Americans, are using the following methods to guide your charitable giving,you have probably not been supporting high-performing charities.

  1. Helping charities that call you over the phone. These charities, often associated with providing funds for veterans, the police, or disabled children, have extraordinarily high overhead expenses and few of the dollars raised go towards programs. This can be verified by reviewing their IRS form.
  2. Supported charities that send you mailings that include low-cost give-away premiums with your solicitation. Many of these charities pay a very high percentage of the funds they raise to outside fundraising entities. You can check this out by reviewing their IRS form. It is not at all uncommon for these charities to receive less than 10 percent of the total funds raised with 90 percent going to the fundraiser. There are many reputable hospitals sending out premiums with bequest solicitations.
  3. Giving to charities that rely very heavily on glitzy gala events to raise their funds. Event fundraising can be expensive and often the preponderance of the $250 to $500 ticket is not a tax deduction because it goes to the venue, the florist, and the caterer.
  4. Supporting charities with spacious offices with high-end furniture and paintings on the wall. Unless the space and the art work are donated, this can be a red flag. I’m not suggesting that nonprofit offices should be shabby with stained carpets and furniture that is falling apart, but overspending on these items rarely correlates with high-quality client services.
  5. Assisting charities that offer their employees salaries and perks that are well beyond the norms for other charitable organizations. I do not believe that folks who enter the nonprofit sector, like priests, need to take a vow of poverty. In fact, I believe too many folks in the nonprofit sector are underpaid and I have no problem whatsoever when I see the head of a high-performing nonprofit with a $10 million operating budget, adequate operating reserves and little debt earning $175,000 to $200,000.
  6. Support charities that are not enrolled in rating services and are not able to readily produce output/performance data and audited financial statements. These can be red flags.

There is a general feeling that the new tax laws, which set a $10,000 limit on state and local tax deductions and increase the standard deduction, will result in fewer New Jerseyans itemizing and take a tax benefit from charitable giving. As a result, giving could be even more altruistic than in the past. This could result in additional taxpayers becoming more selective with regard to the charities they support. I hope it also means that donors will devote more time and effort to ascertaining whether the charities they are supporting are making a real difference in the lives of the clients they are serving. With less funding available, it is more important than ever that Americans support charities that are efficient and effective.