A Donor’s Guide to Preemptive Love’s Financial Statements
The organization’s financial statements show they are spending less on those in need while raising more than ever.
NOTE: This is a followup to my earlier post on the abuse and misconduct I witnessed at Preemptive Love. The content was reviewed by a financial professional for accuracy before posting.
Preemptive Love raised a record $15.2 million in 2020. Despite a pandemic. Despite uncertainty. Despite a year that started with a lot of us wondering when the bottom would fall out.
By April or May, it was clear to many of us at Preemptive Love that the bottom was not going to fall out, at least not for us. We had raised well over $1 million for Covid-19 emergency relief efforts. We’d go on to raise a similar amount after the explosion in Beirut. By the second half of 2020, it was clear that Preemptive Love was going to have a very good year.
So how did Preemptive Love spend its money?
In late November 2021, the organization published its financial statements for 2020. Their own data shows that Preemptive Love spends a small — and shrinking — amount of its earnings to serve displaced and vulnerable families.
Furthermore, Preemptive Love seems to rely on an expansive (and possibly misleading) definition of what counts as a program expense, making it look as though the organization spends more than it really does on actual programs and services.
In this post, I will walk through Preemptive Love’s financials, using data shared publicly on their website. I’ll show how the organization’s priorities appear to have shifted over time, from spending a relatively large share of its budget on humanitarian aid to a much smaller amount today.
First, let’s talk about how nonprofits measure financial efficiency.
Measuring a charity’s financial effectiveness
Traditionally, nonprofit expenses are lumped into two broad categories: programs and overhead. “Programs” include any costs related to the organization’s charitable activity — distributing food, running medical clinics, or giving grants to help people start their own businesses, for example. “Overhead” is anything related to day-to-day operations: salaries, office space, marketing expenses, etc.
Conventional wisdom says nonprofits should maximize their spending on programs relative to overhead. Some charities feature a pie chart on their websites, showing exactly how much of their budget goes to each, like this example from World Vision’s homepage.
This approach can be taken too far. For one thing, charities should pay their people well. They should spend money on marketing and fundraising, if they want to grow their impact.
For another thing, some expenses fall into a gray area between pure “programs” and “overhead.” For example, the salaries of anyone whose main role is implementing the organization’s humanitarian programming. Say, an emergency relief officer. Or the medical staff who work at your mobile health clinic. Their salaries are likely to be classified as a program expense — while my salary when I was director of communications for Preemptive Love should have been treated as overhead. (More on why I say should have been below.)
In other words, pie charts aren’t everything. Charities shouldn’t gut administrative spending just to make their overhead ratio look good.
But if you’re a donor, it’s reasonable to expect the lion’s share of your donation will go to actually helping people.
While overhead ratios aren’t everything, charities should work to ensure they put every dollar they can to programming that produces real, measurable impact.
With that in mind, let’s take a closer look at Preemptive Love’s financial picture. I will rely mainly on their 2020 audited financial statements and IRS 990 filing. Both documents are available on their website.
Preemptive Love spent an unusually small amount of its budget on charitable activities in 2020.
As you can see below, all program costs, as claimed by Preemptive Love, amount to 66% of their total budget for 2020. While there is no one right “target” for how much a charity should spend on programs, this falls well below the norm. Seven out of 10 charities evaluated by Charity Navigator spend 75% or more of their budget on programs and services.
The disparity is even clearer when you look at Preemptive Love’s revenue. Program spending amounted to just 42% of what they raised in 2020.
In other words, Preemptive Love made $5.5 million in revenue after expenses for 2021.
That’s a nonprofit organization with an effective profit margin of 36%.
Ending the year with what is effectively a net profit is not necessarily a bad thing. There are a few entirely legitimate reasons why this may happen:
- Some charities raise money for the year ahead, rather than the one they’re currently in. In other words, money raised in 2020 is spent in 2021, money raised in 2021 will be spent in 2022, and so on.
- The Covid-19 pandemic disrupted many charities’ ability to implement their programming in 2020 (though in Preemptive Love’s case, it created new opportunities too).
- If a charity sees an influx of cash near the end of its financial year, its spending-to-income ratio will look out of whack — as was the case for Preemptive Love in 2016, when they raised $6 million during the last three weeks of the year. There’s no way a charity can responsibly spend that much in the final weeks of the year—and they shouldn’t try just to make their financial statements look balanced.
What you see more recently with Preemptive Love is different. It’s less a one-off fluke and more a pattern. Over the last four years, Preemptive Love has averaged an annual profit of $2.2 million. (Technically with nonprofits, it’s called “net asset,” but for all practical purposes it’s profit—income after expenses.)
More significantly, the gap between Preemptive Love’s income and program spending is widening with time:
Preemptive Love’s program spending is on a downward trajectory.
Preemptive Love did not always spend this little on humanitarian endeavors.
In 2017 and 2018, the organization allocated a healthy 80–83% of its total spending to programs and services. Granted, that’s if you accept their definition of what counts as a program expense (more on that below). But even if you only count what they spent on direct, tangible programming, it still comes to 58–66% of their total budget during those years.
Things started changing in 2019–20. (See the first two charts above.)
What accounts for most of this change? Grants to local partners. Or namely, the lack of them.
- In 2018, Preemptive Love distributed $5.9 million in grants to local partners.
- In 2019, they gave $2.5 million in partner grants.
- In 2020, that number fell to $957,423.
In other words, the amount Preemptive Love gives to partners has plummeted over the last three years. This seems odd for an organization that says it exists, in part, to “build up local organizations, not our own.”
There are two possible reasons why Preemptive Love invests a fraction of what it used to in local partners:
1. Preemptive Love’s emergency relief work in Iraq decreased significantly after the war with ISIS ended.
It can be argued the situation in Iraq wasn’t as dire anymore, once the fighting stopped, so there wasn’t as much need for emergency relief. But this is probably an oversimplification. Some 1.2 million Iraqis were still displaced at the end of 2020. They don’t have access to big, UN-run refugee camps. What little support there is for them has been dwindling since the war ended. You could argue their situation is still dire—and, in fact, Preemptive Love has. What mostly seems to have changed for Preemptive Love was that the cameras moved on. Iraq stopped making the news. Preemptive Love’s CEO Jeremy Courtney has made no secret of the fact that one of the factors he uses to decide which programming to prioritize is “going where the news coverage is.”
2. Jessica Courtney became Chief Program Officer around this time.
Before 2019, Jessica focused largely on the organization’s empowerment program, working especially with refugee families who make soap, washcloths, and other goods that are sold in Preemptive Love’s online shop. Since becoming Chief Program Officer, Jessica has made no secret of her desire to rely less on local partners and do more of her own, direct programming instead—particularly in Iraq. But Preemptive Love does not have the infrastructure or bandwidth to do this work at the scale of some of its partners. So while grants to local partners have fallen sharply, Preemptive Love’s direct program spending has not increased by a similar amount.
What counts as a program expense?
As noted before, what counts as a program expense is not always straightforward. Some expenses, such as salaries, can be either a program or overhead expense, depending on how the money is used.
In 2020, payroll was Preemptive Love’s biggest program cost. Of the $6.4 million they claimed in program expenses, 44% went to salaries and related benefits. Just 25% of claimed program expenses went to, well… programming (that is, grants to local partners and direct spending on emergency relief and job creation).
There are also indications that Preemptive Love sometimes stretches the definition of a program cost. For example:
- They claimed 63% of their entire payroll as a programming expense. Yet just under half their staff, as listed on their website, serve in what appear to be program roles. A slight majority perform largely administrative, marketing, or fundraising functions.
- Early in my tenure at Preemptive Love, I was sometimes asked to fill out a spreadsheet earmarking part of my hours worked as a program cost, despite serving exclusively in a marketing and communications role. I’ve heard from other staff who were expected to do the same. Eventually, executive leadership stopped sending me these spreadsheets — perhaps because I didn’t claim “enough” of my time as a program cost.
- On their IRS 990 filling (page 10, line 12), Preemptive Love claims $352,159 in “advertising and promotion” as a program service expense. This allocation of ad funds as a program cost came at the direction of CEO Jeremy Courtney.
When looking at Preemptive Love’s most direct programming costs — namely, the amount granted to local partners or spent on direct emergency relief and job creation — Preemptive Love invested just $1.6 million for 2020.
That’s little more than 10% of its total revenue that year.
To be clear, these are not the only legitimate program expenses Preemptive Love had that year. You need staff and time and vehicles and fuel and a host of other things to make your charitable programming happen.
But it’s just as clear that not everything Preemptive Love claims as a program expense is, in fact, a program expense.
The purpose of charity
Some charities try to justify questionable financial practices by pointing out the weaknesses of an old-school fixation with overhead ratios. Others unapologetically declare they’re not interested in running their charity like a charity; they’re running it like a business.
No question, there’s plenty charities can learn from the business world. There are best practices they could adopt—such as a focus on outcomes (i.e. did our programming actually help anyone?) over activity (i.e. did we give out lots of food?).
Taken too far, however, we risk blurring an important distinction between nonprofit and for-profit organizations:
For-profit companies exist for the benefit of their owners, shareholders, and executives. Nonprofits exist for the benefit of the people they serve.
When you spend only 10% of what you make on direct, tangible programming, you’re acting for your own benefit, not the benefit of those you serve.
When you stretch the definition of a “program expense” to make it look as though you spend more on charitable activities than you actually do, you’re acting for your own benefit, not the benefit of those you serve.
When you pocket an average effective “profit” of $2.2 million a year — and a staggering $5.5 million in 2020 alone—you’re acting for your own benefit, not the benefit of those you serve.
Charities like Preemptive Love belong, first and foremost, to the people they serve. Their financials should reflect that.