Private Advisory Group

Get Acquainted with your Charity’s Financial Practices

Posted by Steve

Even if you have a favorite charity, doing a little homework can reassure you that your donation is going to a good cause rather than lining the pockets of the charity’s executives.

1. Look for an IRS-approved charity. Tax-exempt status means your contributions are tax-deductible, plus the IRS has become pretty good at weeding out bogus organizations. Of course, the IRS hasn’t become perfect at it yet, and so, you’ll want to continue with the next steps.
2. Locate the charity’s Form 990. These forms are public information for any charity that earns more than $25,000. You can access charity tax returns through these evaluation websites: GuideStar and Charity Navigator. To get the Form 990 for any organization, you’ll have to register (for free) and conduct and Advanced Search. If you have the charities’ exact legal name, that helps.
3. Check the charity’s excess or deficit. This is essentially their operating profit and loss statement and it’s likely you’ll want to see expenses that are pretty close to the revenue numbers.
4. Check their net assets at the end of the year. This figure is the charity’s net worth as of that date. You might be surprised to find that number can be quite high, but ultimately you choose whether to add your donation to their pile or not.
5. Check their functional expenses. This schedule tells you how much was spent on various categories for the charity’s services. In most cases, you’ll want to see expenses that are consistent with the charity’s stated purpose and mission. It’s also nice to see modest overhead numbers, but again, it’s ultimately your decision.
6. Finally, check the salaries and other distributions to officers, directors, and employees. This doesn’t mean you have to avoid giving to a charity simply because the CEO makes over $100,000, however. According to Charity Navigator, the median CEO salary for charities with expenses between $3.5 and $13.5 million is $160,000.

Try not to fixate on charity ratings

The websites shown above: Charity Navigator and GuideStar have sprung into being to help donors evaluate a charity, specifically their administrative, employee, and fund-raising expenses. While it’s important to look at their ratings, it’s also important to understand that non profits have become experts in managing their rating. In the past, some have disguised fund-raising mail as ‘educational material’ or passed fund-raising costs along as charitable program expenses.

Of course, there’s also the other side of the coin: some charitable organizations earn lower ratings when they don’t deserve it. For example, groups with higher overhead, such as food banks, may have higher administrative costs because the provide a direct service to people in need.

Best method if you’re still unsure? Pick up the phone and ask the non profit to explain the numbers behind their rating. Speaking with an executive or financial officer – and be sure to ask specific questions – can tell you a lot about whether that particular non profit deserves your money.