Spending more time researching the nonprofits donors wish to support has become a growing trend. While I support this trend for any donor who has the time, I worry when anyone tries to analyze or compare something that they don't completely understand. Most donors state that the most important thing they wish to review is a nonprofit's financials. Therefore, I have provided below all the information needed to review a nonprofit's finances by utilizing it's public financial records.
HOWEVER, I am not only going to provide information that paints a black and white picture – because we all know there is no such thing. I will be explaining how to understand a more realistic picture – a gray one. Once you have ALL the information you feel you need (and I suggest looking at more than just financials), including the muddy part, you can make your own informed decision.
The best way to get financial information about nonprofits is through their Form 990, a report that they file each year with the IRS. You can find an organization’s most recent 990 for free at Guidestar.org. The 990s are filled with information… and you can learn a lot from this one document if you know exactly where to look.
1. The Mission
The Black and White: A nonprofits mission can be found in Part III, line 1. This is important because it summarizes exactly what the organization does. As long as the organization is honest, this is a pretty black and white finding.
2. Program Expenses and Overhead
The Black & White: You can find out how much the nonprofit spent on its programs in Part IX, line 25, column b. In order to determine what percentage of an organization's expenses were for programs, you simply divide Column b by Column a. To have a baseline for comparison, in its standards of accountability (http://www.bbb.org/us/standards-for-charity-accountability/), the Better Business Bureau says an organization should spend at least 65 percent of total expenses on programs. Program expenses are defined as all costs directly supporting programs, plus some salary, overhead and fundraising costs (only to the extent those activities promote the charity's programs) can also be included.
The Gray: Determining how much is spent on "overhead" versus "expenses" is where things become very gray. First, don't ever assume you are comparing apples to apples in this category. Depending on how each individual is trained and how much they "cherry pick" the numbers, what is included in expenses versus overhead can be very different. For example, one nonprofit may characterize the presidents salary as 100% overhead, while another may include a significant part or even 100% of the presidents salary to programs because that person is out advocating on behalf of programs, raising money, etc. (I personally believe an average of 1/2 of a president's salary is acceptable, but read more about this issue in my previous post on Overhead Expenses.). To take it one step further, some organization's may put together the percentages, and then "tweak" them if the overhead seems to high. Usually it is fairly innocent, like changing the president's fairly subjective percentage from 40% to 50%, but it is still something to keep in mind.
The majority of nonprofits are not trying to scam anyone, but knowing the emphasis donors put on overhead %, they are simply trying to portray the important work of their organization in the best possible light. However, as a donor, you need to understand how these things work in order to realistically compare your choices.