8. Charity research guide – part 3

Estimated reading time: 10-12 minutes

This is the second chapter of my Charity Research Guide series, designed to help us make informed donation decisions. In Part 1 and Part 2, I explained the first four criteria for evaluating charities – the full list of six criteria can be found at the below downloadable table for tracking your research.

In Part 3, we’ll wrap things up by looking at the final two criteria: finances, and reputation and reviews.

5. Finances

Finances! Everyone’s favorite way to spend their free time—reading charity financial statements. Right? …Yeah, probably not.

Still, they matter. As The Eagles once sang, “You can’t hide your lyin’ eyes.” Just like a forced smile can’t hide the truth in someone’s eyes, a charity’s financials often reveal more than the glossy images on their website. You can dress up the front, but the numbers tell the real story—at least eventually.

The truth is, some charities are mismanaged and may not be using funds responsibly. Others may not even need funds, stockpiling large reserves and not spending them effectively. Checking financial statements can reveal these risks.

Let’s look at a recent example that shows why financial transparency matters. Breast Cancer Canada, a Canadian charity often described as a “rising star,” has seen donations grow rapidly in recent years. On its website, the organization claimed that 92% of its $16 million in spending went to charitable activities—suggesting a lean 8% overhead.

But when you dig into their audited financial statements, a very different story appears. Only $1.4 million of that $16 million actually went to charitable programs. That’s not an 8% overhead—it’s a staggering 91% overhead, driven by suspiciously high fundraising costs. This is why you can’t just trust what’s on a website. A charity can spin its numbers for marketing, but it can’t lie to the Canada Revenue Agency. For more on this story, check out the Toronto Star article from December 15, 2024.

Taking a quick look at a charity’s financials is a key step before deciding to donate. Thankfully, you don’t need to be an accountant to do it. There are some tools and resources out there to help make sense of the basics. But first, we’ll start with the more thorough, manual approach.

To do this, we need to look at a charity’s financial statements. These reports give a clear picture of how the organization earns and spends money – and they’re a key part of holding charities accountable. In Canada, all registered charities must submit financial statements to the Canada Revenue Agency (CRA), and if a charity brings in more than $250,000 per year, those statements must be audited. It’s one of the main ways the CRA helps ensure donations are being used responsibly.

You can usually find a charity’s financial statements on its website. If they’re missing, that’s already a red flag – it suggests the organization isn’t being transparent. In that case, you can try reaching out and requesting the documents directly. But if they won’t provide them, it’s a sign to move on. A trustworthy charity should have no issue sharing how it handles donations.

Once we’ve found the financial statements, we can start investigating into the charity’s financial health. The two key documents to look at are the Statement of Financial Position (or balance sheet), which shows the charity’s assets and liabilities, and the Statement of Operations (or income statement), which outlines revenues and expenses.

On the balance sheet, the key figure to focus on is the net assets, which represents the difference between a charity’s assets and liabilities. If net assets are positive and growing, that’s a strong indicator of financial stability. However, if net assets are negative, it suggests the charity may be facing serious financial challenges.

It’s also important to watch for charities with very high assets, particularly large financial reserves, especially when compared to their spending on programs and services. While having reserves isn’t necessarily a bad thing – they can support sustainable growth – excessive reserves combined with ongoing donation requests may raise concerns. This could suggest the charity is hoarding donations rather than using them effectively to fulfill its mission.

While each organization’s needs may vary, generally, having reserved equivalent to 6 months to 2 years of operating costs is considered appropriate. If you come across a charity with excessive reserves, they should have a reserve fund policy in place to explain why they’re holding onto those funds. If this isn’t clear and transparent, it’s a red flag.

Next, let’s take a look at the income statement to assess the charity’s revenue and expenses. Ideally, we want to see revenue growing over time and coming from diverse sources – such as government funding, private donations, and fees for services. Relying too heavily on one funding source can make a charity vulnerable to changes, like shifts in government policy, economic downturns that reduce donations, or the loss of a major donor. Many organizations recently faced this reality after U.S. government cuts to foreign aid. Understanding the revenue mix helps us determine how our donation fits in and whether it will have a meaningful impact. For example, if a charity is 99% government-funded, it’s worth questioning whether your private donation is truly needed.

We should also check the difference between revenue and expenses to see if the charity has an annual surplus or deficit. A surplus means the charity is bringing in more revenue than it’s spending, which can be used to fund future projects or build reserves. However, consistently large annual surpluses – especially over 20% – could raise concerns. If this trend continues for years, it may suggest the charity isn’t using its funds effectively to support its mission. On the other hand, a deficit means the charity is spending more than it’s bringing in, which could be a red flag warning sign if it happens year after year.

Beyond these key points, the financial statements can reveal a lot of additional insights, so don’t hesitate to explore them further. As we discussed in Part 2, you can also look at overhead expenses and fundraising efficiency to get a fuller picture of how the charity operates.

In terms of resources that can help us at this stage, I can mention two: Charity Intelligence and Charitydata.ca. Charity Intelligence is excellent for financial information. First, they provide links to a charity’s audited financial statements, and in some cases, they even have access to these statements when the charity doesn’t publish them on its own website. Additionally, their Financial Review section simplifies the financials, highlighting the key details you need to know. Charitydata.ca is another great resource, especially for spotting trends, as it offers data from the past 5 years. The downside is that their data comes directly from CRA returns, so it can be a bit challenging to interpret unless you have an accounting background.

As we’ve done in the previous chapters, let’s use True North Aid as an example. Their financial statements are easily accessible on their website, which is a good sign. Looking at their 2023 financial statement, their balance sheet shows total assets of $1.34 million, mostly in cash, and liabilities of $300k, giving them net assets of around $1 million. They note, though, that $400k of this is internally earmarked for a specific project, leaving them with roughly $600k in general fund reserves. Considering the organization’s annual expenses are just over $2 million, this means they have enough to cover about 3-4 months of operations if funding were to suddenly stop. While this is on the lower side, it could also suggest they are efficiently allocating their capital towards operations and are ready to accept further donations. So, overall, there’s no significant red flag here.

Turning to their income statement, I see that they have revenues of about $2 million, meaning they are a medium-sized charity. At this point, it’s easy to start thinking about how small our donation might seem relative to their total revenue (for example, if I donate $100, it’s just 0.005% of their annual revenue). While it’s natural to assume our donations have a greater impact with smaller organizations with less revenue, as we discussed in Part 2, impact doesn’t depend on size. In fact, in some cases, a large organization may offer a better impact per dollar, as they can take advantage of economies of scale.

I also notice that their revenue increased by 36% over the previous year, indicating strong growth. After deducting expenses, True North Aid has a surplus of $71k, which represents about 3% of their total revenue. This falls within a healthy range and suggests they are efficiently allocating most of their funds towards their operations.

Finally, I see that 98% of their revenue comes from donations, highlighting their heavy reliance on donor support. I’m curious to dig a bit deeper to see if there’s a breakdown of the types of donors. While the financial statements don’t provide this detail, their Impact Report reveals that they have various corporate sponsors, likely making larger donations. It also shares that 73% of their donors gave under $50, suggesting a solid base of smaller donors. This context is helpful, as it allows potential donors like us to understand where we fit within the overall structure.

TRUE NORTH AID
Research Criteria	Research Notes
5. Finances: – Are financial reports publicly available? – Where does their funding come from (government, donations, fees)? – Is their revenue greater than expenses? – How much financial reserves do they have?	– Financial statements are publicly available – 98% funding from donations, showing heavy reliance on donors. Mix of corporate and private – 3% annual surplus, healthy – Reserves for 3–4 months, quite low

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6. Reputation and reviews

This brings us to our final research criteria – reputation and reviews. While a charity may look great on paper and excel in the first five criteria, reading reviews can help uncover potential concerns, such as fraud, mismanagement, or ineffectiveness. We’re quick to check Google reviews before trying a new business, but we often overlook doing the same before donating to a charity.

So, the first step is simple – Google it! Or, ChatGPT it, I suppose these days. See what you can find. You might come across reviews from former employees, clients who have benefited from the charity’s work, or others who have had some form of interaction with it.

You can also check sites like Google Maps, which is often a great resource for reviews, especially for local organizations. Additionally, the ‘News’ section of Google can be helpful to see if the charity has appeared in any articles over the past few years. If there have been any scandals or issues, this is likely where you’d find them.

We can also check social media, as comments on the organization’s posts can sometimes provide valuable insights. For example, while a charity may post about its accomplishments, the comments section may reveal rebuttals or criticisms from the perspective of the clients they serve.

One great resource is the website Great Nonprofits, where users can leave reviews about charities –  think of it as Yelp for nonprofits. While the site is based in California and primarily focuses on American charities, it also covers some of the larger international organizations.

Finally, the best review you can get is your own. Consider engaging with the charity directly – whether by contacting them, visiting their offices, or volunteering – to gain a firsthand understanding of their work.

Returning to our True North Aid example, a quick Google search reveals a few interesting details. First, I notice a sponsored ad for their website at the top of the results, indicating that they’re using Google Ads as part of their advertising strategy, which I just thought was interesting. Secondly, I come across a Google Maps listing for the organization, with one lonely 5-star review. While it’s positive, it’s not very helpful given that it’s the only review.

On Google News, I found several articles about their programming from various sources, and nothing concerning came up. They also have a strong social media presence across multiple platforms, with generally positive engagement and no red flags. I also attempted to contact them by email and on LinkedIn with a few ideas for their programs, but unfortunately, I never received a response. However, I did receive a Christmas card from them asking for more donations!

Overall, they pass this test, so let’s input these final details into our table.

TRUE NORTH AID
Research Criteria	Research Notes
6. Reputation and Reviews: – Are there complaints or controversies? – Are beneficiaries, donors, and experts generally positive?	– No complaints or controversies can be found – Generally positive engagement from the public

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Overall Evaluation

Now that we’ve explored all six of our research criteria, we’ve reached the final stage: making an overall evaluation of whether we feel confident about donating to this organization. Take a moment to review all the information you’ve gathered and consider how you feel about it. Are there any concerns that suggest you should reconsider?

We should ask ourselves questions like, “Do I trust this organization to use my donation effectively?”,  “Do they have a clear need for more funding?”, “Is this charity the best option compared to alternatives?” and “Would I feel confident recommending this charity to others?”.

For True North Aid, when I look back through all the collected information, I don’t see any major concerns – aside from a lack of real impact reporting, which makes it difficult to clearly assess their outcomes. That said, this is a common challenge for many charities. They are quite transparent about their finances and activities, and my sense is that they are making a meaningful impact in an area where support is urgently needed.

Here’s our final table below combining all our insights.

TRUE NORTH AID
Research Criteria	Research Notes
1. Mission: – What problem do they aim to solve? – What programs do they plan to achieve it? – Are their methods evidence-based? – What is the depth, scale, and long-term impact of the mission?	– Humanitarian support to northern and remote Indigenous communities in Canada – Programs: essential goods, employment initiatives, reconciliation programs, community-led projects – High depth of impact – essential items very needed – Medium scale – 25,000 people, 50 locations – Medium long-term impact – investing in communities but some dependency concerns – No evidence provided to back up program methods
2. Type of Organization: – Is it a registered charity or something else? – Is it local, national, or international? – How big and bureaucratic is it? – Is it religious or politically affiliated?	– Registered Canadian charity – Small staff of 6, but fairly large operational footprint – Secular, no specific other affiliations
3. Effectiveness: – Does it measure its impact and publish results? – Do they report meaningful outcomes, not only outputs? – Are there independent evaluations or studies?	– Yes, publishes results in annual report – Outcomes are impressive, meeting mission goals – Minimal evidence of outcomes, especially long-term
4a. Efficiency: Impact per Dollar: – Do they report impact per dollar figures? – If not, can we calculate the estimated cost per outcome or output? – How do they compare to similar organizations?	– No, impact per dollar not provided – For supplies program, they delivered 0.26 pounds per dollar, up from 0.13 the previous year – Cannot identify another similar organization program to compare it to
4b. Efficiency: Overheads: – Are they transparent about administrative costs? – Do they justify their overhead spending? – Are they reasonable, and not extremely high or low?	– Do not specify their overheads, but publish their financial statements to enable public to calculate – Overheads are not justified with any explanation – Overhead is 11–39% range, within reason
5. Finances: – Are financial reports publicly available? – Where does their funding come from (government, donations, fees)? – Is their revenue greater than expenses? – How much financial reserves do they have?	– Financial statements are publicly available – 98% funding from donations, showing heavy reliance on donors. Mix of corporate and private – 3% annual surplus, healthy – Reserves for 3–4 months, quite low
6. Reputation and Reviews: – Are there complaints or controversies? – Are beneficiaries, donors, and experts generally positive?	– No complaints or controversies can be found – Generally positive engagement from the public
Overall Evaluation: – Do I trust this organization to use my donation effectively? – Do they have a clear need for more funding? – Is this charity the best option compared to alternatives? – Would I feel confident recommending this charity to others?	– This organization appears to use donations somewhat effectively – They have a clear need for more funding – Yes, I could recommend it to others but it’s not my top choice – If the charity could improve its impact reporting, I would be willing to donate more

At this stage, it still might be hard to decide if it’s the best organization to donate to. Ideally, you will evaluate multiple organizations and compare them. Once you do this, it becomes much easier to see the relative strengths and weaknesses of each, helping you determine which one might be the best fit overall.

So if you’ve actually made it this far in your analysis, congratulations! While I’m sure you’ve realized that it’s not so easy or clear-cut to identify the best charities, we are undoubtedly better informed and can hopefully make somewhat better decisions.

Mother Teresa is often quoted as saying, “It’s not how much we give, but how much love we put into giving.” I believe that doing this kind of research is a form of love — it shows that we care enough about the cause to put in the effort.

I plan to include two additional chapters in this guide. Part 4 will offer a list of the various websites and resources mentioned throughout, so you can easily reference them. Part 5 will provide additional examples of charity evaluations I’ve conducted using this methodology. So stay tuned!