Most of us as fundraisers have been to training sessions that tell us to use our IRS 990s as tools to tell our organization’s story. After looking at the lines of numbers for an hour, it is hard to think of any donor actually using the document as a tool to learn about a nonprofit.
The truth is, savvy donors DO use the 990 as a tool to sift through the charities to which they are considering giving. They likely don’t use it as a tool to learn about the mission (though the mission and programs are described in the 990), but to determine whether the organization is financially sound.
I’ll describe the way I evaluate a charity to which I am considering donating. In general, I hear of a charity through word of mouth or a story on the news. My first step is to visit the organization’s web site to read about their mission and programs, maybe to read a few of the newsletters posted online. I also look at their list of board members and the organizations they represent (to determine industry balance and skills that help govern the organization), as well as the couple most recent annual reports if they are posted. I also usually Google the nonprofit to see what kind of press they get and what kind of reputation they have.
If I am really compelled by the mission and programs, I will look up the charity’s IRS 990, to see where their funding comes from, and how much they spend on certain things, like fundraising and management. I know that might be an old way to look at a charity’s ability to handle funds. Some would say we need to focus more on outcomes and what they produce, than how much they spend on fundraising. I agree that we need to look at outcomes as critically important, but I think looking at the financials is significant too.
For example, if an organization had $100,000 in revenue, but only spent $50,000 on programs, it begs the question…. where did the other $50,000 go? There could well be valid explanations, like if it is a new organization and money needed to be spent on creating the infrastructure upon which the programs will run. There could, however, be untoward reasons as well. Seeing the numbers arms a donor with the information needed to know to ask the right questions of the charity. For example, if a charity is a relatively small, say $500,000 budget, but their CEO makes $200,000, it might be something a donor wants to consider before adding money to the pot.
That is the spending side. But it is also important to look at the revenue side. Is all the money coming from one place? A charity that has $200,000 in revenue that all comes from United Way, might be vulnerable in the future if that United Way funding falters.
After looking at the numbers, if I talk to a charity, they should be able to easily report outcomes from their programs, and explain where their main funding comes from and on what it is spent. Often, very small or inexperienced nonprofits will tend to generalize and give high level examples of what your donation money could do. But donors are experienced enough now to want more specific examples and proof.
Experienced donors look at giving to a charity like they look at investing. Evaluating a nonprofit organization’s annual report and IRS forms is like researching prospectuses for investing in stocks. Whether investing for themselves or so that a nonprofit may better the community in some way, donors want to know their invested funds are used the best way possible.