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Chapter 7: The Importance of Transparency

Chapter 7: The Importance of Transparency

Donors have plenty of options when it comes to giving money to a nonprofit. According to the National Center forCharitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the U.S as of 2016.When choosing a charity, donors want to know that the organization is trustworthy and will use their money in theway they intended. How can you make sure that your organization passes muster? Transparency is key.
Donors have plenty of options when it comes to giving money to a nonprofit. According to the National Center forCharitable Statistics (NCCS)1, more than 1.5 million nonprofit organizations are registered in the U.Sas of 2016. When choosing a charity, donors want to know that the organization is trustworthy and will use theirmoney in the way they intended. How can you make sure that your organization passes muster? Transparency is key.

What Donors Look For in a Nonprofit
Donors are looking for nonprofits that make an impact by truly helping a specific issue. They want to seeefficiently run organizations that don’t squander resources and that use their donations wisely. Here are some ofthe elements donors are looking for in a nonprofit, as well as tips for how nonprofit organizations can communicateto their donors with full transparency.

Have a Clear, Specific Mission — and Communicate It
First and foremost, donors are seeking organizations whose missions align with their values. It’s good practice tohave a clearly defined mission and vision, and to communicate this on your organization’s website and in printedmaterials such as annual reports and donor newsletters. Be honest and specific. If your organization serves aspecific geographic region or demographic, share that information upfront so donors won’t feel like they weremisled or misinformed.
Have a Clear, Specific Mission and Communicate It
Some organizations shift their mission over time to address changing needs. The March of Dimes, for example, hasbeen around since World War II and was originally founded to help Americans with polio2. Once polio waslargely eradicated, the March of Dimes shifted its mission to focus on preventing birth defects. Be honest aboutyour organization’s history, whether it’s long and storied or brand-new.

Tax-Exempt Status
Always let donors know if your organization is a 501(c)(3) tax-exempt organization. According to the IRS, “To betax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operatedexclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any privateshareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influencelegislation as a substantial part of its activities and it may not participate in any campaign activity for oragainst political candidates.”3 Donors can easily look up your tax-exempt status using websites likeGuideStar or Charity Navigator.

If your organization has yet to achieve tax-exempt status, let your prospective donors know about this upfront.Although they might not be able to get a full tax deduction for their donation (depending on whether theapplication is approved), they still might be excited to help a new nonprofit get off the ground. If the IRSapproves a pending tax-exempt status, the status is recognized retroactively to the date the nonprofit was created,and donors’ contributions will then be tax-deductible.

Financial Information
Nearly all tax-exempt nonprofits in the U.S. are required to file a tax form — known as a Form 990 (or a variation,like the Form 990-EZ, Form 990-N or Form 990-PF) — with the federal government each year. Nonprofits are requiredto make their 990 forms public4, and many organizations include a link to their 990s on their websites.Donors can also look up charities’ 990s using online tools like GuideStar. The 990 includes information such asboard members, the organization’s employees with the highest salaries, payments made to contractors, the amount ofmoney spent on advertising/promotion and office expenses, total revenue and expenses and more.
Financial Information
In addition, most states in the U.S. require nonprofits to file audited financial statements.5 In thisdocument, an independent auditor looks at a nonprofit’s finances. Many foundations (including private foundations,corporate foundations and family foundations) require an organization’s audited financial statements and 990 whenthe organization is applying for a grant.

Nonprofits also need an annual operating budget with details on the estimated and actual budget for the prior andcurrent fiscal year. The organization's board must review and approve the annual operating budget.6 Somefunders may ask for the annual operating budget as part of a grant request.

The amount of money that nonprofits spend on administrative and other expenses (office supplies, equipment, etc.)not directly related to programs is known as “overhead.” Conventional wisdom stated that overhead should be kept aslow as possible — but in more recent years, a number of thought leaders in the nonprofit world have denounced thisidea.7

In 2013, three charity watchdog organizations (GuideStar, Charity Navigator and the BBB Wise Giving Alliance)published a joint letter debunking the “overhead myth.” Dan Pallotta, the founder of numerous high-profile charityevents (including the Breast Cancer 3-Day walks and the multi-day AIDS Rides), as well an author of numerous bookson nonprofits, has campaigned heavily against the old overhead rule, giving many talks and publishing numerousarticles on the topic.

Although there’s no hard number or ratio for the amount of acceptable overhead, organizations should still be waryabout spending too much on overhead. Be upfront with your donors about how much you spend on non-program expenses.Many organizations list this information (or even include a pie chart with this detail) in their annual reports.

Metrics and Benchmarks
If your nonprofit receives a grant from a foundation, you may be required to submit reports to the funder on anannual or semi-annual basis. It’s good practice to include a section in your grant proposal that provides detailson how you plan to evaluate the program for which you’re seeking funding.

Keep accurate records about the people you serve or the number of services you provide. Donors want to know how tomeasure your organization's success, and they’ll take note of organizations that can track their success and shareit. GuideStar currently gives gold, silver and bronze ratings for nonprofits that offer a high level oftransparency and provide great detail about their effectiveness.

Annual Reports
Many organizations distribute an annual report, either digitally or on paper. Unlike with a tax form, there’s nohard and fast rule for what must be included in a nonprofit’s annual report. Annual reports come in all kinds offormats, lengths and configurations. They can be very simple or incredibly complex. These are some components toconsider including in an annual report:

Your organization’s recent accomplishments, including data about how many people were served (orhow many acres of wetland were saved, how many animals were adopted, etc.)
Financial information, in a clear and easy-to-understand format
A list of donors
Thank-yous to those who donated
Case studies or profiles of people who were helped by the organization
Ways people can help your organization (donating, volunteering, etc.)
Compelling photos and graphics

Change Happens … Make Sure to Communicate It
Sometimes, despite the best intentions, things don’t always go as planned. For example, you may receive a grantfrom a foundation or a donation from an individual that was earmarked for a specific project. Then, due tounforeseen circumstances, the project was delayed, got canceled or simply didn’t pan out as hoped. For instance,perhaps the lead staff person who was supposed to carry out the project left the organization unexpectedly.

In any of these cases, it’s always best to be upfront with your donor about the situation. Be proactive, andcommunicate any changes in plans, personnel, costs, etc. In some instances, you may need to get written permissionfrom the donor to use their funds differently from the way you originally anticipated.

Other Ways to Communicate With Transparency
Be clear and consistent in all your communications with donors. If you say you’ll put out a monthly newsletter orrelease an annual report once a year, stick with it. Make sure your website isn’t outdated, and be sure to updateany incorrect information on it.

You want all your prospects and donors to feel that your organization is always operating with maximum efficiency,trust and transparency. The more trust you can build in your organization, the more donations you’ll receive.Honesty truly is the best policy.

1 National Center for Charitable Statistics (NCCS), Quick Facts About Nonprofits

2 March of Dimes, “A history of the March of Dimes”

4 Cullinane Law Group, “Nonprofit Law Basics: Do Nonprofits File Tax Returns? What is a 990?”

5 Council of Nonprofits, "State Law Nonprofit Audit Requirements”,

6 Houston Chronicle, “How to Calculate an Operating Budget for a Non-Profit Organization”

7 Nonprofit Chronicles, “Evaluating Nonprofits: If Not Overheard, Then What”?

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  • tafadzwa

    hey thanx for the article it was really helpful. b ut i was wondering if i could like to get a reference for this article for the purposes of my research.

  • charleshowe

    I want to upgrade our account as a non-profit. We are a clown unit in Shriners international. How do we go about getting the discount?