More discussion on how to analyze a charity’s financial statements. Red Cross as an illustration.

There is some dialogue in the nonprofit world on how to characterize the ‘overhead’ of American Red Cross. Here’s a few articles.

1/9 – ProPublica – Senator Demands Answers on Red Cross’ Finances – Sen. Grassley is asking the American Red Cross to explain the math behind their widely repeated public comments that 91% of donations go to their services. Article says their audited financial statements reportedly show that 26% of expenses are for fundraising.

01/2015 – Charity Watch – Don’t Be Misled by Deceptive Charity Efficiency Claims – Do you see a big difference between these two statements?

“85 cents of every dollar spent goes to our charitable programs.”

“85 cents of every dollar donated goes to our charitable programs.”

There can be a huge difference depending on whether there is a large difference between total revenue and total expense. Also, if there is a lot of program revenue in addition to contributions.

Article explains how those two statements can be quite different.

1/14 – Counting on Charity helps by Reconciling Claims About Spending by the Red Cross – Much of difference in those comments on the Red Cross is due to comparing supporting services to total expenses or total revenue.

A cursory look at the 2013 financials makes me wonder how someone can claim 26% for fundraising.

Here are a few of my quick calculation:

  • Supporting services as percent of total revenue – 9.5%
  • Supporting services as percent of total expenses – 9.6%
  • Fundraising as percent of total expenses – 5.6%
  • Fundraising as percent of revenue excluding biomedical (i.e. blood sales) – 13.5%
  • Fundraising as percent of contributed revenue – 17.5%

If you want to do so, all of the above ratios can be recalculated by including the nonoperating gain and expense which is categorized at the bottom of the statement of activity.

There isn’t that much of a gap between how the Red Cross has described their ratios and how someone else might do so.  The 91% is likely high, but there can be a long and honest debate about what number should be used when making a one sentence comment. The debate would center around which calculation is best.  Also I don’t see where the 26% number comes from. Did I miss it?

This specific discussion and all parts of the articles above illustrate how difficult it is to interpret the so-called ‘overhead ratios.’

What do you think? Professional comments welcome.

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