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Please note: This item is from our archives and was published in 2012. It is provided for historical reference. The content may be out of date and links may no longer function.
Many nonprofits operate with tight resources, and some are struggling to survive in the slow economy. Here are ways to determine if the charities your clients support are effectively governed, accountable and fiscally responsible.
Check the organization’s tax-exempt status and confirm that it is in good standing. The IRS compiles a list of organizations eligible to receive tax-deductible charitable contributions called Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986 (available at irs.gov/app/pub-78).
Review the nonprofit’s financials. Online tools such as the Foundation Center’s 990 Finder (foundationcenter.org/findfunders/990finder) allow users to review copies of nonprofits’ most recently filed Forms 990. The forms contain useful information on a nonprofit’s assets, liabilities, reserves, expenses and revenue sources. Another alternative is to request annual reports from organizations. Not only do annual reports contain important financial information, but they also usually address programs and activities for the year.
Ensure that expenses are reasonable given projected income and the scope of the organization’s work. An overhead, or expense, ratio measures how much of each donation is spent on programs as opposed to administrative and fundraising costs. However, low overhead does not necessarily indicate greater organizational efficiency, nor does it necessarily indicate how effectively an organization accomplishes its mission.
Pay attention to the diversity of funding sources. If the organization receives government funding, look at how it has coped with delayed payments and social services funding cuts. Has the organization diversified funding sources by turning to private donors, program-related loans and/or program-related investments? Has it reduced operating expenses?
Review the organization’s investment policies. Find out the track record of the investment manager(s). Ask if a conflict-of-interest policy is in place. Financial information and/or annual reports often indicate who manages the organization’s funds and investments. Investment-manager track records usually are available through several sources, including institutionalinvestor.com, sifma.org/amf and morningstar.com. A conflict-of-interest policy comes into play if the investment manager(s) sits on the board of directors or is an officer.
Evaluate the organization’s mission. Are programs and services aligned with the organization’s mission and your client’s philanthropic agenda? Check the nonprofit’s website for a mission statement. If it’s not there, ask the organization for it.
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Visit the organization; meet the leadership and staff. How deep and experienced are leadership and staff relative to the programs and services they deliver? What professional and technical resources are in-house? What is outsourced and to whom? Also, confirm whether strategic and fundraising plans are in place. How are they being implemented?
Reach out to philanthropic advisory professionals. It can be helpful to talk with a professional who works with donors on effective giving strategies. Find out what questions the professional believes you should ask when vetting an organization. What “red flags” should you look for in the financial statements? What shouldn’t you ask?
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