Not-For-Profits Can Impress Donors With Financial Statements
Attracting individual donors to your not-for-profit organization is a little like finding a spouse — you want to make the best impression during the courtship period to spur commitment. The financial information on your nonprofit has the potential to create a similar first impression. Keep the following in mind as you prepare financial data for scrutiny.
Sizing Your Organization Up
Before deciding where to contribute their dollars, major funders will likely request two pieces of information to make their assessment of your organization. One is a copy of your most recent audit or financial statements prepared by a CPA. The other is a copy of your most recently filed Form 990.
Your challenge is to make sure that information in these documents presents your organization accurately and in the most favorable light. Armed with this, your potential funder will be able to see how your nonprofit stacks up against similar organizations.
Funders often take information from a nonprofit’s financial statement and Form 990 and plug it into three ratios.
1. Program Spending Ratio
Your program spending ratio is one of the most common benchmarking measurements that will interest possible funders. The ratio is calculated by dividing your program service expenses by total expenses.
The resulting percentage is the portion of your not-for-profit’s expenditures spent on program services. The higher the percentage, the more efficient your organization is with funder dollars.
In its BBB Standards for Charity Accountability, the Better Business Bureau (BBB) says that a nonprofit should have a program spending ratio of 65% or higher. Several nonprofit watchdog organizations routinely rate and publish this percentage for the nonprofits they cover.
A funder will benchmark your organization against these percentages to determine if your nonprofit is likely to spend its dollars 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.
2. Fundraising Efficiency Ratio
Your organization’s fundraising efficiency ratio is another metric that frequently interests potential funders. It’s calculated by dividing unrestricted donations by fundraising expenses.
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. According to the BBB, this percentage should be no more than 35%, which would mean it costs no more than 35 cents to raise each contribution or grant dollar.
3. Management Expense Ratio
Another good measure of a nonprofit’s efficiency is the portion of expenditures spent to support administrative and other operations, or the management expense ratio. It’s calculated by dividing total management and general expenses by total expenses.
Most funders 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, commonly less than 25%. However, you may have legitimate reasons for a higher management expense ratio. If applicable, be sure to communicate these reasons.
Other Yardsticks
Most funders will consider other financial factors, as well. Some may perform a trend analysis, placing the three most recent years of financial information side by side to view increasing or decreasing trends in revenue and expenses.
A decreasing trend in financial support could indicate that your nonprofit will be unable to sustain itself in the future. Or, if program expenses are growing at a faster rate than fundraising expense, your organization could be experiencing some inefficiencies or mismanagement.
Many funders also will examine your accumulation of unrestricted net assets. A successful organization avoids accumulating excessive unrestricted funds that otherwise could be directed toward program services. Typically, your nonprofit’s unrestricted net assets available for use should be no more than three times the size of your past year’s expenses or three times the size of your current year’s budget, whichever is greater. To avoid the appearance of accumulating excess funds, you may want to designate, either on the face of your Statement of Financial Position or in a descriptive footnote, certain amounts for specific purposes such as debt service or building repairs.
Show Potential Funders the Outcome
Funders have long valued expense ratios and other metrics that quantify your nonprofit’s financial health. But potential funders are often just as interested in the impact your organization makes in the community. Be sure you reliably measure the outcomes of your program dollars and report the results to the funder.
Let’s say that the ABC Company awarded the Job Retraining Center $100,000 to fund programs. If the Job Retraining Center wants to receive funding for a second year, it likely will need to report to ABC Company how that money was used — and, importantly, what results were achieved.
For example, the ABC Company would be interested to know that 76 people upgraded their computer skills through a six-week training course (funded with dollars from the company) at the center. Of those 76 people, 57 were called in for interviews by employers seeking people for positions requiring computer skills. Of those 57 people, 28 were called back for second interviews and 16 were offered positions.
Also consider including outcomes information on Form 990.
Image Your Organization Presents
In summary, your nonprofit must recognize what information contained in your financial statements and Form 990s might tell funding organizations, individual contributors and the public. The image your organization is presenting to possible suitors can either draw them closer or send them running.
Copyright 2024
This article appeared in Walz Group’s July 22, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.
