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.
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?
—By Betsy Brill ( betsy@stratphilanthropy.com ), MBA, founder and president, and Susan Winer ( susan@stratphilanthropy.com ), senior vice president–Business, both of Strategic Philanthropy Ltd. in Chicago.
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