Put your best foot forward Donors and grant-making organizations often are approached by nonprofits about which they know little or nothing. Increasingly sophisticated, many of these donors and funders will research your nonprofit and benchmark it against other nonprofits to determine if it’s worthy of their gift. In today’s highly competitive charitable-giving climate, it’s critical to put your best foot forward and provide potential donors as much useful information as possible. But what information is important to a donor or funder before it makes a sizable donation or funding commitment? And what financial benchmarks and other analyses will they examine when making an evaluation? Ensure information is accurate, favorable A donor likely will request two pieces of information to make its assessment. One is a copy of your most recent financial statements prepared by your accountant, and the other is a copy of your most recently filed Form 990. Your job is to make sure that information in these documents not only is accurate, but presents your organization in the most favorable light possible. Armed with this information, your potential donor will be able to see how your nonprofit stacks up against similar organizations in a way that has the best chance of working for you. Get to know benchmarking ratios Funders and donors often take information from a nonprofit’s financial statement and Form 990 and plug it into these benchmarking ratios: Program spending ratio. One of the most common benchmarking measurements, this ratio is calculated as follows: o Program expenses o Total expenses The resulting percentage represents the portion of your organization’s expenditures spent on program service. The higher the percentage, the more efficient your nonprofit is with donor dollars. In its BBB Wise Giving Alliance Standards for Charity Accountability, the Better Business Bureau (BBB) holds that a nonprofit should have a program efficiency ratio of 65% or higher. Additionally, several nonprofit watchdog organizations, including Charity Navigator and the American Institute of Philanthropy, routinely rate and publish this percentage for some of the larger and more prominent nonprofits. A donor or funder will benchmark your nonprofit against these percentages to determine if your organization — or someone else’s — will likely spend its dollars most efficiently. Because of this, it’s important to accurately categorize your expenses by function. This maximizes the amount allocated to program costs as opposed to management and general or fundraising expenses. Fundraising efficiency ratio. This is another of the most common ratios and is calculated as follows: o Total fundraising expense o Contribution income “Contribution income” refers to those contributions received as a direct result of its fundraising activities. This resulting percentage is a signpost of how much it costs to raise each contribution dollar. Generally, the lower this percentage, the more dollars available to support program services. The BBB states that this percentage should be no more than 35%, which would mean it costs no more than $0.35 to raise each contribution dollar. Management and general to total expenses. Another good measure of a nonprofit’s efficiency is the portion of expenditures spent to support administrative functions. This percentage is calculated as follows: o Total management and general expenses o Total expenses Most donors want to see their donations support program services and thus will look for organizations with a low percentage of management and general to total expenses, usually in the range of 25% or less. A nonprofit with a high percentage for this generally will be deemed inefficient in running its organization, unless it’s able to communicate the reasons for the unusually high percentage. Consider other factors Most donors and funders will consider other financial factors as well. For example, some may perform trend analysis, placing the three most recent years of financial information side by side to see the increase or decrease trends in revenue and expenses. A decreasing trend in financial support could indicate that the nonprofit will be unable to sustain itself in the future. Additionally, if program expenses are growing at a slower rate than fundraising or supporting services, the nonprofit could be experiencing some inefficiencies or mismanagement. Many donors and funders also will examine your accumulation of unrestricted net assets. A successful not-for-profit avoids accumulating an excess of unrestricted funds that otherwise could be directed toward program services. According to BBB guidelines, a nonprofit’s unrestricted net assets available for use should be no more than three times the size of its past year’s expenses or three times the size of its current year’s budget, whichever is more. Too much excess funds might signal to a donor or funder that its resources aren’t needed. But you can avoid the appearance of accumulating too much in excess funds if the board designates a portion of the unrestricted reserves for a specific purpose, such as a contingency or building fund. Capture information accurately These are some of the common methods used to measure and analyze the financial effectiveness of a nonprofit’s operations. Be aware of these techniques. And make sure your organization carefully and accurately reports its financial information to project itself as positively as possible when someone applies them. Consult your financial advisor on the proper way to capture this information. • |