OUR THOUGHTS ON:

Introducing CN 2.1: Redefining Charity Navigator's Star Rating System

Not-for-Profit

By Dan Nesbit

Charity Navigator, a not-for-profit watchdog agency, focuses its metrics on financial health and accountability and transparency.  On June 1, 2016, Charity Navigator introduced changes to its rating system, which is now called CN 2.1.  These changes will incorporate historical data into the calculations, and will provide a potential donor and those charged with governance with an enhanced perspective on the overall financial health of the organization.

The primary changes were made to the financial health calculation, with program expenses, administrative expenses, fundraising expenses, fundraising efficiency, and working capital ratio now being calculated based on an average of the last three fiscal years, as opposed to only the previous fiscal year in its prior rating system.  The utilization of historical data is beneficial to potential donors and the organization’s governing board, as certain outlier years, such as anniversary years, will be brought back into perspective, and a more transparent picture of the financial health of the organization is presented. 

A new metric was added upon the introduction of CN 2.1, the Liabilities to Assets Ratio, which will provide transparency for donors regarding organizations with significant outstanding debt.

The impact of CN 2.1 is evident, as 8,000 organizations received new scores, and 27% of them received new ratings.  Also, 49 organizations earned perfect scores, which was not possible under the previous rating system.  Only 8% of organizations had ratings decrease by one star. 

Overall, the changes brought on by CN 2.1 provide valuable insight to those charged with governance, and potential donors, and paints a more accurate picture of the financial health of a not-for-profit organization.  

If you have any questions regarding the Charity Navigator's rating system, please contact us. For more Not-for-Profit insights visit our Our Thoughts On blog

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