We lost a Charity Navigator star. What happened?
Since charity: water’s inception in 2006, we’ve received the highest ratings and reviews from every major nonprofit organization that assesses a charity’s financial health, accountability, and transparency (including Charity Navigator, Guidestar, Charity Watch, Better Business Bureau, etc.).
But it’s always been a little complicated.
Our organization was built on a vision to reinvent charity. We set out not only to bring clean water to every person on the planet, but also to restore public trust by being radically transparent and finding new ways to prove impact.
On day one, we made a bold promise that 100% of public donations would always bring clean water to people in developing countries. To maintain that promise, we found a separate group (now, about 150 individuals and families from around the world) to fund our overhead costs.
Since then, we’ve treated the two sides of our business differently — with separate purposes, separate fundraising goals, and separate bank accounts for water project funding and operations funding.
And while our Charity Navigator profile has never reflected this unique model, it’s never been a setback for our official rating either.
In fact, even under the new and revised ratings methodology that Charity Navigator introduced in 2016 (called CN 2.1), the “rolled up” or simplified review of our accounts still yielded us their top 4-star rating.
However, as we continue to grow (and increase funding on the Water Project side faster than the Operations side), two of Charity Navigator’s financial capacity metrics now result in scoring penalties for charity: water.
The First Metric: Working Capital Ratio (Charity Navigator’s Performance Metric 6)
Working Capital is meant to measure how long a charity could sustain its level of spending using net available assets. As you might imagine, it’s one of the most important metrics we track.
Charity Navigator believes that financially healthy charities should have at least one year of working capital (i.e. a working capital ratio of 100% or more). We agree. Internally, we actually hold ourselves to an even higher standard, aiming for one to two years of working capital (or 100% to 200%) as you can see in our 2018 Consolidated Financial Statements.
Unfortunately, Charity Navigator’s formula is unable to distinguish between how we fund Water Projects and Operations. So even our water project related assets and expenses (which we cannot use for Operations, as per our 100% Model) get aggregated into the calculation.
So while our calculation of our Working Capital ratio for 2018 was 2.1 years, Charity Navigator’s formula sees it as .91 years. And instead of receiving 10 out of 10 for this metric, we received 7.5 out of 10.
Again, we fully support the intent behind this metric; but disagree with the way it’s being calculated. If you look only at the net available assets reserved for operations and operating expenses, you’ll accurately see how long we can sustain our operations spending using net available assets.
The Second Metric: Liabilities to Assets (Charity Navigator’s Performance Metric 7)
Part of Charity Navigator’s purpose in rating the financial performance of charities is to help donors assess the financial capacity and sustainability of a charity. Liabilities to Assets is meant to measure risk and solvency based on what you’re holding and what you owe (similar to a debt ratio). We agree with that intention too!
But again, Charity Navigator’s formula aggregates liabilities and assets for both the Water Project funding and Operations sides of our business. So even the money that we’re responsibly holding as financial commitments to our local partners gets unnecessarily labeled as debt.
This is an important detail: When charity: water signs a grant to implement a year-long project with a local partner, we commit to make disbursements based on certain milestones. From an accounting perspective, these financial commitments to partners are considered money that we “owe” and get recorded as a liability, which — on paper — looks like debt. But in reality, it’s 100% backed by cash that we have in our bank account (as you can see in our 2018 Consolidated Financial Statements). There is zero risk that we’d default on our commitments because we already have the cash.
As we see it, at the end of 2018, excluding Water Project related assets and liabilities, we had $1 million in Operations Liabilities with over $31 million in Operations assets to cover those liabilities. But because of the way Charity Navigator calculates this metric using our total liabilities and assets, our Liabilities to Assets ratio is 50% instead of 3.2% when only using Operations assets.
Where we could be getting 10 out of 10 on this measure, we score 5 out of 10.
As we continue to grow, we’ll contract even more projects that give more people clean water. Which means our “liabilities” will also be growing. And since the Charity Navigator algorithm views liabilities as “debt,” they see our growing commitments to water projects as a bad thing.
The reality couldn’t be more different.
We’re disappointed.
We agree with Charity Navigator that the financial health of an organization is important. We’ve been in extended conversations with them about our concerns for the past several years, but we’ve been unable to reach a positive resolution.
We also believe that it would be irresponsible to change the way we work for a rating.
Today, we’re operating with greater transparency and impact around the world than ever before. We’ll continue to share all of our financial records and audit reports online. We’ll continue to send 100% of public donations to transform lives and futures for people in need. And we’ll continue to prove every project you fund.
Questions? Comments? We’re easy to find: info@charitywater.org
** Numbers updated as of July 14, 2020.
