023 DGM – How to Know If a Charity Needs More Money — in 3 Minutes

How to Know If a Charity Needs More Money — in 3 Minutes

Welcome. This is the podcast that helps you do good even better — regardless of which charities or causes you support. 

This is Ed Long. Each week on this podcast I talk about charities and provide actionable tips to help donors and volunteers to take their philanthropy to the next level and do good even better.

Give smart from your heart, because doing good matters.

We’re building a community of caring people who want to make the world better. And are willing to spend time and energy to make it happen. And to find and support strong charities doing solid work.

You can Join the Community now. Last week Beth in Nashville, TN, became member #220. This week June in Bayside, NY, became member #230. Will you become member #240?

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Episode sponsor

  • Today’s sponsor is the number 9.23.
    • Our sponsors don’t pay us anything. But they give us a way to talk about a different charity-related concept each week. And help you and me grow our understanding of nonprofits and charities
    • 9.23 is the Reserve Ratio of Guide Dogs for the Blind — that means it has assets available to cover more than 9 years of spending. That’s based on its Form 990 for 2012.
    • It may have a great mission, but with a Reserve Ratio greater than 9 it doesn’t need more money now.
    • Don’t confuse this group with other guide dog groups. Use its unique EIN to find more information about it. The EIN is 94-1196195.
    • Any time an organization has such big asset reserves it doesn’t need more financial support.
    • That leads us to our main topic for today.
    • Remember: We have to dig before we donate!
      • Find out who you are dealing with.
      • Find out how they spend the money entrusted to them.
      • Find out whether they actually need more.
    • CharityCheck101.org is a great place to start your digging. You can find the identity, tax status and EIN (employer identification number) of every one of the 1.4 million+ nonprofits recognized by the IRS. Nonprofit EINs are the key to fast research on nonprofits, and avoiding charity fakes.

Main topic

  • How to Know If a Charity Needs More Money — in 3 MinutesDonation Needed?
    • What’s a Reserve Ratio?
      • In its Form 990 or Form 990-EZ a charity will report its net assets (assets minus liabilities) and total expenses for the year. Its Reserve Ratio is calculated by dividing the net assets by the total expenses.

      • For example: an organization reports net assets of $750,000 and $300,000 of expenses. Dividing the net assets of $750,000 by $300,000 in expenses produces a result of 2.5. That’s its Reserve Ratio.

    • Why calculate the Reserve Ratio? An organization’s Reserve Ratio is an indicator of whether its financial reserves are smaller than needed, appropriate or greater than needed.
      • An organization with inadequate reserves may be in danger of failing.
      • An organization with very large reserves may not need your support.
    • What’s an appropriate Reserve Ratio? A Reserve Ratio of 1.0 means the charity has one year of spending in reserve. Six months (Ratio = 0.5) to two years (Ratio = 2.0) is a reasonable target for a charity. So, in my view,
      • a ratio between 0.5 and 2.0 is appropriate (green zone),
      • a ratio below 0.5 or above 2.0 (but not above 5.0) might be reasonable in an organization’s specific circumstances, but should be discussed directly with and satisfactorily explained by the organization’s management before a donation is made (yellow zone), and
      • a ratio above 5.0 (red zone) means the organization failed to meet the SeriousGivers screening standard — it doesn’t need more of our money. Reserve Ratio
  • Your smart and easy assignment for today
    • Figure the Reserve Ratio for a charity you gave to recently. Time yourself. You can beat 3 minutes.
  • A big part of giving smart from your heart is knowing whether the charities you support need more money. 
  • Had experiences? Have feedback? Share your thoughts  in the Reply / Comment section at the bottom of the page. Or email me at ed[@]seriousgivers.org

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About Ed Long, the podcaster

Podcaster Ed Long has been preparing more than 40 years to do this podcast. He knows charities and the rules that apply to them. He’s analyzed charity finances and operations.  He’s founded and run charities, and volunteered for them. He’s helped the public and law enforcement fight fake charities, and has served as a philanthropy educator and coach. Before all that he worked as a partner with a major Wall Street law firm. Ed is the founder and CEO of SeriousGivers, which itself is a charity. Ed knows the great work that strong charities can do with the resources entrusted to them, and is passionate about helping others find and support strong charities.