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 in the hope that the other person will find you to be a “good catch” and make a 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 not-for-profit stacks up against similar organizations.
Funders often take information from a nonprofit’s financial statement and Form 990 and plug it into three ratios:
- Program spending ratio,
- Fundraising efficiency ratio and
- Management expense ratio.
How Your Organization Spends Money
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 Wise Giving Alliance 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.
How Your Organization “Brings Home the Bacon”
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.
How Your Household Is Managed
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%. A nonprofit with a high percentage may be deemed inefficient. However, you may have legitimate reasons for a higher management expense ratio. If applicable, be sure to communicate these reasons.
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. According to BBB guidelines, a not-for-profit’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.
If unrestricted net assets appear excessive, a funder may decide your nonprofit doesn’t need its contribution. 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.
What Type of Image Does Your Organization Present?
In summary, your organization 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.
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