Explaining The MinistryWatch 5-Star Ratings System
One of the most interesting – and, if well understood, most helpful – aspects of the MinistryWatch database its 5-star rating system.
So let’s unpack the system so you can know what it does, and what it does not, do.
First, the ratings attempt to measure financial efficiency. In layman’s terms, financial efficiency is getting the most out of the least amount of resources. Financial efficiency is not the only basis for donors to make giving decisions. However, we believe that this kind of information can be relevant and useful.
Second, the ratings are objective. They are based entirely on financial ratios derived from information in an organization’s IRS Form 990 or audited financial statements. The ratings do not consider program outcome measurements. These program outcomes should be very relevant to a donor, but they are not easy to calculate or obtain in any standardized format that can be applied to all organizations.
Third, the ratings are relative. No independent benchmarks are set for the financial ratios. Instead, the financial ratios of organizations with similar purposes and structures are compared to one another to determine relative efficiency.
Fourth, the ratings assess organizations along four separate dimensions which every non-profit needs to manage: Fund Acquisition, Resource Allocation, Asset Leverage, and Liquidity Maintenance.
The Four Dimensions of Financial Efficiency
Here’s a brief description of the four dimensions of financial efficiency.
Fund Acquisition. The Fund Acquisition efficiency rating uses ratios that relate to the way an organization raises funds. The less money an organization spends on fundraising as a percentage of its total revenue, the higher its rating in this category since more money will be left for ministry.
Resource Allocation. The Resource Allocation efficiency rating uses ratios that relate to the way an organization spends its money. The more money an organization spends on its ministry efforts, and the less money it spends on administrative and other non-program costs, the higher its rating in this category.
Asset Leverage. The Asset Leverage efficiency rating measures the way an organization uses its assets to further its operations. An organization with few financial liabilities (which could include debt) will typically rate higher. However, an organization with large endowments or large physical assets (such as real estate holdings) will typically rate lower.
Liquidity Maintenance. The Liquidity Maintenance efficiency rating uses ratios that relate to the way an organization manages its current assets to meet immediate needs. In other words, does an organization have enough money to continue to operate without disruption?
Assigning a Star Rating
MinistryWatch uses eight individual ratios, two within each of the four dimensions noted above, for each organization to calculate an overall financial efficiency score for each ministry. (You can see the result of these calculations by clicking on any of the individual ministries in the MinistryWatch database.)
We then compare the results of each organization’s financial efficiency score to other ministries in the in their sector or category in the MinistryWatch database, ranking them from highest to lowest. Organizations are then assigned a star-rating based on the following scale.
5 Stars Ministries in the top 10 percent of financial efficiency scores
4 Stars Ministries between 62.5 percent and 90 percent
3 Stars Ministries between 32.5 percent and 62.5 percent
2 Stars Ministries between 10 percent and 32.5 percent
1 Stars Ministries in the lowest 10 percent
It is important to note that financial efficiency is just one way to measure the effectiveness of an organization. Donors should consider other important factors, such as program outcomes and each ministry’s business model.
It is also important to note that these ratios, and therefore MinistryWatch’s financial efficiency ratings for each ministry, can and do change over time. It is also good to be aware that because the financial efficiency rating system is a relative ranking, a ministry’s rating can change when the data from other ministries change, even while the individual ministry’s financial numbers have not changed.