Chapter 7: The Importance of Transparency

December 21, 2017

Donors have plenty of options when it comes to giving money to a nonprofit. According to the National Center for
Charitable 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 the
way 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 for
Charitable Statistics (NCCS)1, 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 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 see
efficiently run organizations that don’t squander resources and that use their donations wisely. Here are some of
the elements donors are looking for in a nonprofit, as well as tips for how nonprofit organizations can communicate
to 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 to
have a clearly defined mission and vision, and to communicate this on your organization’s website and in printed
materials such as annual reports and donor newsletters. Be honest and specific. If your organization serves a
specific geographic region or demographic, share that information upfront so donors won’t feel like they were
misled 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, has
been around since World War II and was originally founded to help Americans with polio2. Once polio was
largely eradicated, the March of Dimes shifted its mission to focus on preventing birth defects. Be honest about
your 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 be
tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated
exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private
shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence
legislation as a substantial part of its activities and it may not participate in any campaign activity for or
against political candidates.”3 Donors can easily look up your tax-exempt status using websites like
GuideStar 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 the
application is approved), they still might be excited to help a new nonprofit get off the ground. If the IRS
approves 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 required
to 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 as
board members, the organization’s employees with the highest salaries, payments made to contractors, the amount of
money 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 this
document, 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 when
the organization is applying for a grant.

Nonprofits also need an annual operating budget with details on the estimated and actual budget for the prior and
current fiscal year. The organization’s board must review and approve the annual operating budget.6 Some
funders 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 as
low as possible — but in more recent years, a number of thought leaders in the nonprofit world have denounced this

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 charity
events (including the Breast Cancer 3-Day walks and the multi-day AIDS Rides), as well an author of numerous books
on nonprofits, has campaigned heavily against the old overhead rule, giving many talks and publishing numerous
articles on the topic.

Although there’s no hard number or ratio for the amount of acceptable overhead, organizations should still be wary
about 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 an
annual or semi-annual basis. It’s good practice to include a section in your grant proposal that provides details
on 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 to
measure your organization’s success, and they’ll take note of organizations that can track their success and share
it. GuideStar currently gives gold, silver and bronze ratings for nonprofits that offer a high level of
transparency 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 no
hard and fast rule for what must be included in a nonprofit’s annual report. Annual reports come in all kinds of
formats, lengths and configurations. They can be very simple or incredibly complex. These are some components to
consider including in an annual report:

Your organization’s recent accomplishments, including data about how many people were served (or
how 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 grant
from a foundation or a donation from an individual that was earmarked for a specific project. Then, due to
unforeseen 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, and
communicate any changes in plans, personnel, costs, etc. In some instances, you may need to get written permission
from 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 or
release an annual report once a year, stick with it. Make sure your website isn’t outdated, and be sure to update
any 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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