Wall Watchers - Research Process.

RESEARCH APPROACH

MinistryWatch 5 Star Rating System

Introduction to Ratings
Looking at Nonprofits and For Profits
The Ratings Framework
The Efficiency Score
The Model
An Illustration
An Illustration

Using fictitious financial information for one organization, the construction of the ratings is demonstrated here. Organizations compared are all assumed to operate in the same sector and to have been around for at least five years. The first step in producing the ratings is to calculate the eight individual financial ratios used in the model. These eight ratios are calculated using the most recent year's financial information found in the IRS Form 990 or audited financial statements and are shown here for our example organization.

	Ministry Ratio	Ratio Definition
Fund Acquisition Efficiency Ratios
Fundraising Costs Ratio	0.07	(Fundraising Costs / Total Revenue)
Contribution Reliance Ratio	0.50	(Public Contributions / Total Revenue)

Resource Allocation Efficiency Ratios
Spending Ratio	0.95	(Total Expense / Total Revenue)
Program Output Ratio	0.81	(Program Expense / Tot Revenue)

Asset Leverage Efficiency Ratios
Liabilities Ratio	0.31	(Total Liabilities / Total Assets)
Operating Expense Ratio	2.16	(Operating Expense / Total Assets) ¹

Liquidity Maintenance Efficiency Ratios
Current Liabilities Ratio	0.47	(Current Liabilities / Current Assets)
Supplemental Income Ratio	2.35	(Other Income / Current Assets)

1 Operating Expense is defined as Total Expenses less non-operating costs (primarily depreciation and interest).

The next step is to calculate a "score" for each of the eight ratios. This "score" is calculated by dividing the individual ratio for one organization by the average ratio for the entire sector. The ratio scores for the organization in our example are shown below.

	Ministry Ratio	Sector Avg	Ratio Score (Indiv / Sector)
Fund Acquisition Efficiency Ratios
Fundraising Costs Ratio	0.07	0.08	0.88
Contribution Reliance Ratio	0.50	0.71	0.70

Resource Allocation Efficiency Ratios
Spending Ratio	0.95	0.98	0.97
Program Output Ratio	0.81	0.84	0.96

Asset Leverage Efficiency Ratios
Liabilities Ratio	0.31	0.42	0.74
Operating Expense Ratio	2.16	2.60	0.83

Liquidity Maintenance Efficiency Ratios
Current Liabilities Ratio	0.47	0.66	0.71
Supplemental Income Ratio	2.35	1.54	1.53

Next, the risk score is subtracted from the return score for each decision category to calculate four efficiency scores. Based on the distributions of the four efficiency scores for all of the organizations, percent ranks are calculated for each individual organization's four efficiency scores. This is shown below for our example organization.

		Ratio Score (Indiv / Sector)	Efficiency Score (Return - Risk)	Percentile Rank
Fundraising Costs Ratio	Risk	0.88
Contribution Reliance Ratio	Return	0.70
Fund Acquisition Efficiency			(0.17)	7%

Spending Ratio	Risk	0.97
Program Output Ratio	Return	0.96
Resource Allocation Efficiency			(0.01)	47%

Liabilities Ratio	Risk	0.74
Operating Expense Ratio	Return	0.83
Asset Leverage Efficiency			0.09	87%

Current Liabilities Ratio	Risk	0.71
Supplemental Income Ratio	Return	1.53
Liquidity Maintenance Efficiency			0.81	98%

Finally, a rating of one to five stars is assigned to each efficiency measure based on the percent rank distribution described below.

00.0% - 10.0%�� 1 Star

10.1% - 32.5%�� 2 Stars

�� 32.6% - 67.5%�� 3 Stars

�� 67.6% - 90.0%�� 4 Stars

�� 90.1% - 100.0%�� 5 Stars

To determine the overall financial efficiency measure, the four individual percent ranks calculated previously are averaged for each organization. Based on the distribution of this "average percent rank" statistic, a new percent rank is calculated to determine the relative overall financial efficiency of each organization.

	Percent Rank	5 Star Rating
Fund Acquisition Efficiency	7%	*1 Star*
Resource Allocation Efficiency	47%	*3 Stars*
Asset Leverage Efficiency	87%	*4 Stars*
Liquidity Maintenance Efficiency	98%	*5 Stars*

Average of Percentage Ranks	60%		(Simple average of 4 Individual % Ranks)

Overall Financial Efficiency	85%	*4 Stars*	(Based on distribution of all Orgs Avg % Ranks)

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Fund Acquisition Efficiency Ratios