Information for Donors

Do you want to make a difference in your community? Most people do. And that usually means making tax-deductible contributions of money and property to nonprofit organizations that support the causes we care about. Nowadays this support is more important than ever. Nonprofits are being called upon to do more with less; government, foundation and corporate funding have been stagnant or declining, while the costs and demand for services have increased.

Personal giving remains the only potential silver lining in what are otherwise very dark clouds on the nonprofit horizon. According to the American Association of Fundraising Counsel's (AAFRC) Giving USA, 76.3 percent of all estimated charitable giving in 2002 came from individual donors. Individuals represent such an overwhelming percentage of total giving that it's no wonder that many nonprofits are asking these donors for larger contributions.

In this challenging climate, it's also more important than ever for people to make well-informed decisions about where to invest their charitable dollars. Most people tend to give from their heart first, not their head. While it's the thought that counts, contributions may not be made wisely if we don't stop to think about a few key factors.

Give to a Cause You Care About

Most important before giving, we should consider the issues that are important to us. Once we have decided what type of issue and geographic community we would like to positively influence, we then can decide to which organization we would like to contribute. And don't forget, if we cannot give a monetary donation, our nonprofit of choice often will accept volunteers or donations of goods (computers, clothing, food, etc.). So whether it's money or time, we owe it to ourselves to make educated decisions.

There are several online resources to help find the nonprofit organization that best fits our personal requirements. One local resource is the Maryland Association of Nonprofit Organizations' Web site, which lists all of its 1,400 members, their profiles and contact information. It allows us to search by type, zip code, state, city, county and keyword by going to www.marylandnonprofits.org (go to About Us, then click on Member List, then Member Directory).

Another valuable source of information when investigating a nonprofit is its annual report. It's a good source for learning about accomplishments, key programs and services the organization offers. Many nonprofits are now posting annual reports directly on their Web sites. If not, just call them and ask for the latest report.

When researching a nonprofit, pay special attention to the organization's mission statement before giving. The mission statement is an expression of why the organization exists or its purpose for being established. It should be a brief summary of how the organization meets its purpose or needs.

Invest Wisely

Once we find a charity whose missions we care about, don't stop there! When we make a contribution to a charity, we are investing in the nonprofit's business. Wise contributors, like wise investors, should look into the financial health of an organization before writing the check. If a nonprofit is struggling financially, it will be investing time and energy on making ends meet instead of focusing on its mission.

What makes a nonprofit sound? Contrary to what the name suggests, a financially sound nonprofit should make a profit at least three years out of five. For-profit companies strive to make a profit every year, the bigger the better. Profits provide shareholders dividends and increase the wealth of the shareholders. Nonprofits don't have shareholders but over time they need to raise more money than they spend. No business, for-profit or nonprofit, is going to survive very long if spending is higher than revenue.

The difference is that in a nonprofit, the profit must stay in the business and becomes part of the reserves. Ideally, a financially sound nonprofit should have reserves that would allow it to continue to operate for three to six months in case of emergency. These reserves, which are also called net assets or fund balance, are the equivalent of a family having a safety net of three to six months living expenses in the bank in case of job loss or illness.

For many nonprofits, achieving the goal of three to six months of operating reserves is no easy feat and may take years to accomplish. New nonprofits will likely have a smaller reserve than more established nonprofits, just as 20-year-olds are less likely to have a “safety net” than 40-year-olds.  The safety net can never be too big for most people. For a nonprofit, too much in reserve may mean that it isn't spending enough money on its mission. Nonprofits exist to help the needy, be educators and improve the community; they don't exist to accumulate wealth.

We should also look to see what percentage of its money the nonprofit is spending on program activities. A nonprofit should spend most of its money on program activities. A rule of thumb is that at least 75 cents out of each dollar raised should be used for program; the rest of the money is used for management and fundraising. However, don't assume that if one nonprofit spends 98 cents out of each dollar on program that it is superior to one that only spends 80 cents. Larger nonprofits often benefit from an economy of scale on management and fundraising expenses and can direct a larger percentage of money raised to program. But a smaller organization may deal with an issue we are passionate about, may be located in our neighborhood and may have helped a family member or us.

Nonprofits that solicit charitable contributions are required under Maryland law to make financial statements available to the general public upon request. In addition, about one-third of all nonprofits (except churches), with revenues of more than $25,000 or assets in excess of $100,000, must annually complete a Federal tax return, the IRS Form 990.

The IRS Form 990 summarizes an organization's finances (expenses and revenues), lists the salaries of its five highest-paid officials, names all board members and provides a financial snapshot of the nonprofit. By reviewing the 990, we can see if the organization had a surplus of revenue over expenses, how much it has in reserves and how much it is spending on program activities.

Form 990s can be viewed online free of charge at www.guidestar.org. In addition, nonprofits are required by law to share their 990 forms with any member of the public who requests them.

To Recap: How to Give Wisely

Ask the nonprofit to share information about its organization. How willing is it to do this?

1. What is the organization's mission statement? Does the mission statement align with the issues, causes and communities we wish to serve?
2. How can the organization tell that it is making a difference? How does the nonprofit measure its results? What are its evaluation methods?
3. Have we reviewed our nonprofit's IRS Form 990?
4. How does the organization go about achieving its mission?
5. Will the nonprofit allow its donors to remain anonymous?
6. Can the donor request to receive only a limited number of solicitations each year?