What To Ask When Giving

In order to make an informed giving decision, we need to think with our heads as well as our hearts by not only looking into an organization's mission but also its financial health.  When we make a contribution to a charity, we are investing in the nonprofit's business.  Wise contributors, like wise investors, should look into an organization before writing the check.  And don't forget, if you 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, you owe it to yourself to make educated decisions.

Below are some major issues to think about before giving.  Click here for some additional questions to ask.

Give to the Causes You Care About

Most important before giving, we should consider the issues that are important to us.  What do we want to help change or have a positive influence on?  What types of programs do we want to support?  Do we want to focus on a local, state, national, or global community?   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 searchable database that is on this website.  It lists more than 1,500 charities that are members of the Maryland Association of Nonprofit Organizations.  You can search by subject area, zip code, state, city, county, and keyword by clicking here.  Once you fill in the fields you wish to search, individual profiles of organizations can be viewed for contact information, phone numbers, website links, and other pertinent information.

Another valuable source of information when investigating a nonprofit is its annual report, which highlights the major activities of an organization.  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 websites.  If not, just call them and ask for the latest one.  

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!   It's good to keep in mind that wise investors don't buy stock without first checking out whether the company is fiscally sound.  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 (but not churches), those 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 990's 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?

•  What is the organization's mission statement?   Does the mission statement align with the 

    issues, causes, and communities you wish to serve?

•  How can the organization tell that it is making a difference? How does the nonprofit

    measure its results?   What are its evaluation methods?

•  Have we reviewed our nonprofit's IRS Form 990?

•  How does the organization go about achieving its mission?

•  Will the nonprofit allow its donors to remain anonymous?

•  Can the donor request to receive only a limited number of solicitations each year?