Those numbers are extremely strange 1-8 percent to charitable care for a non profit? Shouldn’t it be 65-75 percent? What am I missing that they are spending the vast majority of the funding on besides the ceo salary?
First, a misunderstanding on what is non-profit vs charity. Non-profit doesn’t mean they’re a charity. It means their primary goal isn’t profit for its owners. A charity is always non-profit, but a non-profit is not necessarily a charity. A charity is an entity whose primary purpose is to provide resources to its mission and therefore spends into negatives if not for donations.
Accounting is a complex topic. Unless you’re willing to delve into an organization’s finances in detail and have capacity to understand it in context, it’s best to just say: I don’t know shit. That includes me. Should something be 65-75%? I have no fucking clue. Because we don’t know what these numbers entail. We don’t know how they operate and we don’t know how we’re diving these percentages.
Take american red cross for example. An excellent charity with great reputation, full audits, independent board members, etc. https://www.charitynavigator.org/ein/530196605 You can view their financial score on the charity navigator (easier to understand then suddenly looking at annual reports). Scroll down to Financial Metrics and then look at Program Expense: Ratio. 90.64% (2022). This is the kind of number you’re expecting to see. 3.2% goes to administration and 6.2% goes to fundraising. Seems good. Right?
But what does 90% of the program expense really include? It likely includes whole lot of complexities you aren’t thinking of immediately. Like logistics cost of delivering goods in need. Some of those are expenses which will go to for-profit 3PL companies. Necessary cost, of course. It also would include salaries of any professionals or boots on the ground that’s going to do the labor. It’s going to include costs of anything they need to buy to operate. Etc. At the end of the day, we have no real understanding of how much money is actually going to someone in need versus how much money is needed to do get to that point. That will include lot of things we have no idea that even exists. Regardless of complexities, they spent 90% of their money into funding the program as a whole. So we need to understand that we’re comparing a single thing here versus a concept of a whole.
But the biggest takeaway here is that above is a spending ratio from the COST. Not revenue.
The number that we’re seeing in 1-8% are charitable case divided by revenue, not something they spent. So these are a calculation of reduction of revenue due to charity. If a hospital spends $1M on a new MRI machine and a doctor to operate it (I have no idea what they cost, just giving numbers here). Collect $1M from paying patients. Not collect $1000 from charitable cases. Then the ratio of revenue would be 0.1% and profit would be 0. But what does that mean from a cost perspective…? 100%. 100% of your cost and revenue goes into program. Would that mean the hospital is doing a fantastic charitable job? Hell no.
The program expense ratio metric is completely meaningless if it’s not a full on charity. Quite frankly, most for-profit business would be in 90% range as well.
Those numbers are extremely strange 1-8 percent to charitable care for a non profit? Shouldn’t it be 65-75 percent? What am I missing that they are spending the vast majority of the funding on besides the ceo salary?
First, a misunderstanding on what is non-profit vs charity. Non-profit doesn’t mean they’re a charity. It means their primary goal isn’t profit for its owners. A charity is always non-profit, but a non-profit is not necessarily a charity. A charity is an entity whose primary purpose is to provide resources to its mission and therefore spends into negatives if not for donations.
Accounting is a complex topic. Unless you’re willing to delve into an organization’s finances in detail and have capacity to understand it in context, it’s best to just say: I don’t know shit. That includes me. Should something be 65-75%? I have no fucking clue. Because we don’t know what these numbers entail. We don’t know how they operate and we don’t know how we’re diving these percentages.
Take american red cross for example. An excellent charity with great reputation, full audits, independent board members, etc. https://www.charitynavigator.org/ein/530196605 You can view their financial score on the charity navigator (easier to understand then suddenly looking at annual reports). Scroll down to Financial Metrics and then look at Program Expense: Ratio. 90.64% (2022). This is the kind of number you’re expecting to see. 3.2% goes to administration and 6.2% goes to fundraising. Seems good. Right?
But what does 90% of the program expense really include? It likely includes whole lot of complexities you aren’t thinking of immediately. Like logistics cost of delivering goods in need. Some of those are expenses which will go to for-profit 3PL companies. Necessary cost, of course. It also would include salaries of any professionals or boots on the ground that’s going to do the labor. It’s going to include costs of anything they need to buy to operate. Etc. At the end of the day, we have no real understanding of how much money is actually going to someone in need versus how much money is needed to do get to that point. That will include lot of things we have no idea that even exists. Regardless of complexities, they spent 90% of their money into funding the program as a whole. So we need to understand that we’re comparing a single thing here versus a concept of a whole.
But the biggest takeaway here is that above is a spending ratio from the COST. Not revenue.
The number that we’re seeing in 1-8% are charitable case divided by revenue, not something they spent. So these are a calculation of reduction of revenue due to charity. If a hospital spends $1M on a new MRI machine and a doctor to operate it (I have no idea what they cost, just giving numbers here). Collect $1M from paying patients. Not collect $1000 from charitable cases. Then the ratio of revenue would be 0.1% and profit would be 0. But what does that mean from a cost perspective…? 100%. 100% of your cost and revenue goes into program. Would that mean the hospital is doing a fantastic charitable job? Hell no.
The program expense ratio metric is completely meaningless if it’s not a full on charity. Quite frankly, most for-profit business would be in 90% range as well.