Our Approach to Assessing Room for More Funding
Introduction
Room for More Funding (RFMF) is one of ACE’s four charity evaluation criteria. In this criterion, we examine a charity’s plans for growth and whether they have room for funding on top of their existing plans for expansion. ACE aims to recommend organizations that are both high-impact and scalable, so we seek to ensure that they would be able to absorb and effectively utilize the funding that a new or renewed recommendation may bring in. Otherwise, donations might not be what a charity needs, and we would not want to recommend it to donors. If a charity has room for more funding, the revenue that is expected to come from an ACE recommendation would very likely increase their total impact.
Our 2022 RFMF Assessment
Plans for Expansion
First, we asked charities to project their revenue, expenditures, and plans to grow, maintain, or shrink their programs over the next 30 months, assuming that their ACE recommendation status and the amount of ACE-influenced funding they receive will stay the same. We then assessed our level of confidence (from low to high) in each charity’s projections and their ability to carry out their plans.
We expressed high confidence in charities’ plans for expansion if their growth rate was consistent with past revenue and expenditures, and if the primary barrier to accomplishing their plans was strictly monetary (i.e., not due to lack of time, lack of qualified personnel, or other non-monetary issues). We expressed lower confidence in charities’ plans if their growth rate was overly ambitious or unrealistic, or if they may encounter nonfinancial barriers to the scalability of their programs (e.g., lack of experience managing organizational change, difficulty recruiting and onboarding talent, entry into regions outside of their core expertise, or government restrictions).
For example, if a charity plans to grow one program at a steady rate while another program would require hiring a director to build a team in a new country, the former may be rated as “high” and the latter as “medium,” depending on factors such as whether they have had past success growing internationally and how challenging recruitment in the new country is expected to be.
Unexpected Funding
Next, we asked charities to indicate how they would spend additional, unexpected funding and rated the feasibility of their plans (from low to high) based on factors similar to those under Plans for Expansion.
The amount of funding influenced by an ACE recommendation varies from charity to charity, especially since there is some evidence that repeatedly recommended charities are more appealing to donors and may get more ACE-influenced funding over time. On average, we estimate that the additional funding a charity annually receives due to an ACE recommendation is roughly $200,000 for Standout Charities and $1,000,000 for Top Charities. We used these figures when asking charities how they would spend unexpected funding. For previously recommended charities that were being re-evaluated, our RFMF analysis focused on whether they could continue to effectively absorb funding that comes from our recommendation. See our Giving Metrics Report for more information about how we track ACE-influenced funding.
For example, if a charity currently has an annual revenue of $800,000, we may have “high” confidence that they could absorb $200,000 if they have robust plans to utilize that funding. However, we may only have “medium” confidence that they could absorb $1,000,000 if their plans seem unsustainable in the long term relative to their current operating budget.
Room for More Funding Estimates
Finally, we used our ratings to estimate charities’ RFMF in 2023 and 2024. We shared these estimates with charities for their feedback. The evaluations committee then used charities’ RFMF estimates to determine which were eligible for Top Charity status (RFMF > $1,000,000) and Standout Charity status (RFMF > $200,000).
A charity’s final RFMF numbers may include an adjustment based on the status of the charity’s reserves. Since it is common practice to hold more funds than needed for current expenses in order to be able to withstand changes in the business cycle or external shocks that may affect incoming revenue, we encourage charities to use their ACE-influenced donations to build their reserves and factor that into our RFMF calculations.
For example, if we have “high” confidence that a charity could absorb $200,000, “medium” confidence that they could absorb $1,000,000, and they have a reserves gap of $100,000, we may estimate their 2023 RFMF to be $700,000 and their 2024 RFMF to be $750,000. This would mean that they are eligible for Standout Charity status and may be recommended as such if they perform well in the other three criteria.
Changes from Previous Years
This year, we began assessing our confidence in charities’ plans for expansion for each program and rating the feasibility of their stated uses for unexpected funding. These ratings (from low to high) helped us identify differences in charities’ reporting; some plans are more ambitious than others, which could otherwise bias our estimates of their room for more funding. This marks a departure from our approach in 2021, where we did not consider specific expansions in isolation and only published our final RFMF estimates, rather than making intermediate assessments.
For unexpected funding, we now ask charities how they would spend $200,000, rather than $100,000, because of an increase in how much funding ACE now influences toward our Standout Charities.
We also began comparing charities’ actual amount of reserves to their targeted amount of reserves, rather than assuming how they’re using their net assets. This gives us a more accurate sense of their reserves deficit if their target differs from our traditional suggestion that they hold an amount equal to at least one year of expenditures.
Finally, we focused less on revenue diversity in charity reviews because there is mixed evidence about whether it is correlated with financial stability.1 We continue to report the percentage of charities’ revenue that comes from donations larger than 20% and whether they have income restricted to specific uses. We also now report if charities hold >$10,000 in nonfinancial assets that may be difficult to liquidate quickly. However, like last year, revenue diversity does not play a direct role in our recommendation decision, and we only share this information for donors interested in financial stability.
Limitations and Planned Improvements
Because we cannot predict exactly how charities will react upon receiving more funds than they have planned for, our estimates are speculative—not definitive. For instance, a charity could run out of effective uses for additional funding more quickly than expected. Conversely, they could find good ways to use additional funding that they did not anticipate.
Our RFMF estimates are intended to identify the point at which we would want to check in with a charity to ensure that they have used their funds effectively and can still absorb additional funding. Because of this, we plan to regularly check in with our Top Charities to update our sense of their RFMF at those points in time, based on recent revenue and other relevant updates.
In the future, we plan to improve our team’s understanding of staffing and talent bottlenecks in the animal advocacy movement. This would enable more detailed assessments of charities’ plans to recruit and retain new staff and would allow us to assess and estimate RFMF assessments with greater confidence.
