Nonprofit Fiscal Fitness - September 2005 Issue
A newsletter about issues in the nonprofit business world
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Editor's Note

September 2005 Contents

With the explosive growth in the number of nonprofits, competition for every donor dollar is getting fierce. Nonprofits need to have standards in place to assist donors in making sound giving decisions and to foster public confidence in charitable organizations. In this issue, we'll follow up on last month's accountability discussion with a primer on what nonprofits need to do to achieve accountability and, often just as important, what donors need to know in choosing the best value for their donation.

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Gauging Nonprofit Accountability: What Nonprofits
Need To Do

Nonprofit Fiscal Fitness September 2005: Gauging Nonprofit Accountability: What Nonprofits Need To DoWhat nonprofits need to do
Recently, there has been a lot of debate in the charitable sector about how nonprofits can be more accountable to those who have invested their trust, faith, and money in them. Donors are increasingly demanding to see measurable results from their donations, and the public at large is asking for better governance and more operational transparency. Savvy nonprofits, meanwhile, are discovering that achieving accountability and demonstrating stewardship is a team effort that spans a charity’s entire operation.

Following are the top three things nonprofits should do to maintain the public’s trust.

Make it easy for donors to access information.
Timely, consistent reporting to donors and potential donors reinforces accountability and stewardship, and nonprofits need to provide the public with both financial and non-financial information. In practical terms, this means that nonprofits should make available both their IRS Form 990 and (for larger organizations) their audited financials. Equally important, every nonprofit should be able to explain the impact the organization has made in the community by spending money wisely. Nonprofits need to be proactive in providing both financial reports and information about how donated dollars are being used, and they should take advantage of Web sites, newsletters, donor email updates, and other communications vehicles to tell their story.

Understand state and federal regulations — and follow them.
Too often, nonprofits get into trouble because they have failed to file a tax form or somehow abused their nonprofit status. In fact, the head of the Internal Revenue Service, Mark Everson, wrote a March 30, 2005, letter to the U.S. Senate Finance Committee, stating that his agency has found compliance problems and outright abuses throughout the nonprofit sector. In contrast, the nonprofits that do follow the rules go a long way toward maintaining the public trust.

Invest in their own success.
Nonprofits need to put in place systems to make their financial processes more effective and their activities more transparent. Technology can help, and a little money spent up-front can save considerable time, money, and effort in the long run. Well-designed software can help arm board directors and staff members with the tools and information they need to be accountable, whether making a fundraising pitch to an institutional donor or giving the 30-second “elevator pitch” to a volunteer during a reception. Equally important, using technology to streamline internal processes and reduce the cost of everything from fundraising to financial oversight will ultimately free up dollars for program activities.

 Gauging Nonprofit Accountability: What Donors
Need to Know

Nonprofit Fiscal Fitness: Gauging Nonprofit Accountability: What Donors Need to KnowWith more than 1.5 million nonprofits in the United States alone, choosing the best value per donor dollar can be tricky business. Ideally, every nonprofit should have in place best practices that highlight its commitment not only to the cause but also to transparency and good governance. Unfortunately, however, that is not yet the case. As a result, when looking to make a donation — especially a large one — it is important to put a nonprofit’s commitment to accountability to the test.

Here are the top three questions donors should ask before making a donation.

Financial information — Can you “show me the money?”
Nonprofits are answerable to the public, and an organization’s tax filing (IRS Form 990) should be accessible on its Web site, available to be mailed out, and on-hand for immediate delivery in case a donor walks in the door and asks for this information. Larger organizations should also make available their audited financials for donors to examine. In addition to the nonprofit itself, there are other sources of information about the charitable sector that donors, potential donors, and other stakeholders can access. The bottom line is that donors need to ask for financial information and ask questions about it. The more a nonprofit is willing and able to explain how it operates, the more accountability it is demonstrating.

The mission’s impact — What value will my dollars have?
Nonprofits should be able to explain not only how donor dollars will be spent, but also what impact the donation will have. Even when funds are not earmarked for a specific need, a charity should be able to describe to donors the types of projects it is undertaking and the results it expects to achieve.

Governance — What structures are in place to ensure good stewardship?
Nonprofits need to put in place sound systems and strong oversight in order to make their financial processes more effective and their activities more transparent. Donors (especially those considering a large gift) should ensure that the organization’s board has established an audit committee — and that the committee is, in fact, monitoring financial reporting, internal controls, and business risks. In addition, donors should find out what kind of internal controls the nonprofit has put in place to ensure that transactions are properly authorized, recorded, and reported, and that assets are safeguarded.

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