As a charity, your organization is constantly evaluated; by the IRS, and by donors and grantors. The IRS reviews key areas of your Form 990 to determine whether you are complying with the Internal Revenue Code. It’s important to meet these standards to keep your organization’s tax exempt and public charity status.
Charity watch groups, such as the American Institute of Philanthropy (AIP), the Better Business Bureau Wise Giving Alliance, (BBB) and Charity Navigator, use your 990 and other information to develop a rating that they publish online to help potential donors evaluate your organization. Meeting their standards makes you look better to potential donors and grantors.
With so many standards being used by so many different groups, how do you know how your charity measures up? How do you know which standards to meet to put your best foot forward?
To help nonprofit managers and Board members prioritize, we sifted through many criteria, and developed this “Charity Scorecard” as a tool for you to use to evaluate how your organization may score in the eyes of the IRS, donors and grantors.
The “Charity Scorecard” is a composite of many criteria, including those frequently used as well as those we think are useful. It provides nonprofit managers and Board members with a starting point for prioritizing actions to put your best foot forward. If you are going to focus on ten things to evaluate how you appear to others, consider these points your top ten.
To see how your organization will measure up, ask yourself these 10 questions about your organization:
- Are your program expenses at least 75% of total expenses? Donors and grantors often have specific limits on the amount a charity spends on general and administrative and fund raising costs. The charity watch groups such as AIP, BBB and Charity Navigator all use this ratio to evaluate an organization’s efficiency. Some organizations make the mistake of reporting all salaries and office costs as general and administrative expenses on Form 990. Be sure you are allocating your costs properly between program, fundraising and general and administrative functions. A charity with program expenses that are 75% or more of total expenses will score well.
- Does your organization spend $35 or less to raise $100? This ratio compares total fundraising expenses to total dollars brought in by the fundraising effort. High fundraising costs should be reviewed by management and the Board to evaluate the underlying cause. Sometimes higher fundraising costs are associated with the nature of the donor base or the popularity of the cause. Charity watch groups use this statistic to evaluate an organization’s use of funds. Charities that spend $35 or less to raise $100 will score the best.
- Does your organization have enough unrestricted net assets to cover 1-3 years of expenses? This one may come as a surprise, however, charity watch groups want to see that an organization has enough reserves to continue its mission in a down economy. This ratio compares total unrestricted net assets to total expenses. Organizations with a reserve of more than three years expenses appear less needy, so if you are saving for a special purpose, explain your designated funds on Form 990. Charities with unrestricted net assets to cover 1-3 years expenses will score the best.
- Is your organization’s executive compensation in line with comparable organizations? Charity watch groups calculate and report an organization’s executive compensation as a percentage of total expenses so that donors can compare this percentage with other organizations. The IRS scrutinizes executive compensation for signs of private inurement which can endanger an organization’s exempt status. Charities should be following the IRS safe harbor procedures when establishing executive salaries including using salary surveys and documenting their decisions.
While the executive compensation percentage is not necessarily comparable between a small charity and a large charity, it is a statistic that is being used. You can check other organizations’ percentages on www.charitynavigator.org using the “charity search” field to find the charity and then using the “current rating” tab to find the section on “leadership”. Organization whose executive compensation is in line with that of other organizations of similar size will score best.
- Do you measure and report your organization’s effectiveness? Charities know that reporting measurable successes is good for fundraising. Statements such as “we sent 65 needy children to summer camp” communicate your accomplishments. There is growing recognition in the nonprofit community that strict ratios do not tell the whole story about a charity’s effectiveness. “Measureables” are increasingly seen as an alternative to total reliance on ratios. In fact, in July 2012, Charity Navigator will launch a new rating model that bases 50% of the score on effectiveness and results. Be prepared to report your successes by developing measurable goals related to your mission, collecting data and reporting your accomplishments. Organization’s who are able to illustrate their effectiveness with measurements and statistics of success will score the best.
- Does your organization have adequate Board oversight? The Board’s responsibility is to set policy and ensure the fiscal integrity of the organization. This includes monitoring the organization’s activities, ensuring adequate funding, overseeing the organization’s financial operations compared to budget and exercising stewardship over the organization’s assets. An organization needs to have enough Board members around the table to assemble the knowledge and experience necessary to carry out the Board’s responsibilities. For example, a Board should have individuals with knowledge of fundraising, leadership, mission, finances, investments, the community, and the organization’s past. BBB suggests that organizations have at least 5 independent voting Board members. These individuals need to meet often enough to stay informed about the organization’s activities and exercise oversight and governance as needed. BBB suggests a minimum of three Board meetings per year. Organizations that have at least five independent Board members meeting at least 3 times per year will score best.
- Do you eliminate conflicts of interest? Form 990 promotes the use of conflict of interest policies by requiring organizations to disclose their use and provisions. Policies that track potential conflicts of interest and ensure that Board members are removed from issues where they have an interest avoid the appearance of private inurement which endangers an organization’s exempt status. However, charity watch groups go beyond the conflict of interest policy to promote completely eliminating ongoing conflicts with voting Board members. BBB suggests that an organization have no more than one compensated person as a voting Board member, or no more than 10% of the voting Board, and recommends that there be no compensated Chair or Treasurer. Organizations that eliminate ongoing conflicts of interest and have no more than one compensated Board member and no compensated Chair or Treasurer will score best.
- Do you have audited financial statements if your annual gross income is more than $500,000? Audited financial statements give users confidence in your financial information and they come with a report on any significant control deficiencies the auditors encountered during the audit. These are important to charities trying to raise funds and safeguard assets. However, audits are disproportionately expensive for smaller organizations. BBB and others recommend an audit if gross income is more than $250,000. We suggest that managers and Board members review all.
- Do you post key information on your website—audited financial statements, Form 990, Board list, and more? Charity watch organizations encourage charities to post audited financial statements, Form 990, the Board list, the mission statement and a summary of accomplishments on the organization’s website. The IRS promotes this as a best practice by requiring nonprofits to disclose on Form 990 whether the organization makes its 990 available on its website. Because this kind of transparency is increasingly expected by donors and grantors, charities that post key information on their websites will score the best.
How did you do? While some of these points may be a challenge, the “Charity Scorecard” lets you know what’s out there; what the IRS and donors and grantors are using to size up your organization every day. While these ten points are a good start toward improving your organization’s appearance to the IRS and to donors and grantors, these are not the only points to consider. If you are interested in achieving a specific rating from a specific agency, you will need to visit that organization’s website and individually address each one of their criteria.
The “Charity Scorecard” shows nonprofit managers and Board members the top ten things you can do to improve how you might be viewed by others. Answering “yes” to all the questions will give you the best chance to receive high marks from most of the entities evaluating you. ∆
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