Armanino Blog

Dueling for Dollars - Nonprofit Tax Dollars

by Tom Schulte
April 12, 2012

It’s a sad irony but in poor economic times, like now, there are ever-expanding needs that are being met by a shrinking donor base.

Potential funders have their inboxes stuffed with appeals from worthy causes in need of funds and so in this era where organizations are “dueling for dollars” it is essential that an organization’s financial information create a good first impression.

Before deciding where to put its dollars, a major funder will likely request two pieces of information to make their assessment of your organization. One is a copy of your most recent audit or reviewed financial statements, and the other is a copy of your most recent Form 990.

Your challenge is to make sure that information in these documents presents your organization accurately and in the most favorable light. Armed with this information, your potential funder will be able to see how your nonprofit stacks up against similar organizations.

Funders often take information from a nonprofit’s financial statement and Form 990 and plug it into three ratios: a program spending ratio, a management expense ratio, and a fundraising efficiency ratio.

How You Spend Money
In normal times, funders look closely at your program spending ratio (that is your program expense as it relates to your total expenses). But in difficult times there is more emphasis on your management expense ratio (your management/general + fundraising expense as it relates to your total expense). There is no bright-line percent you can point to as acceptable so the most commonly accepted range would be a maximum 25 percent and a minimum 10 percent (exceeding 25 percent would generally deem you inefficient, while 10 percent or less would deem you to be too efficient and thus, dubious).

A funder will benchmark your nonprofit against these percentages to determine if your organization—or someone else’s organization—will likely spend its dollars most efficiently. Because of this, it’s important to accurately categorize your expenses by function (program, management/general and fundraising).

How You Raise Money
Your nonprofit’s fundraising efficiency ratio (that is your total fundraising expense as it relates to your contribution and grant revenue) is another metric that frequently interests potential funders. Contribution and grant revenue refers to those revenues received as a direct result of your nonprofit’s fundraising activities. This resulting percentage is a signpost of how much it costs to raise each contribution dollar. Generally, the lower this percentage, the more dollars available to support program services.

The Better Business Bureau (BBB) states that this percentage should be no more than 35 percent, which would mean it costs no more than 35 cents to raise each contribution or grant dollar. If your organization has events of any sort then it becomes essential that the “direct benefit” dollars (that is the portion of any fundraising expenses that are incurred that provide a benefit to the donors) be allocated out of fundraising expense and net against the event revenue. We have seen cases where this can increase the fundraising efficiency factor by a significant amount.

Your Need for Money
There was a time when funding organizations would look at a worthy cause in financial turmoil and see if their donation may be able to “right the ship.” That was a practice that seems to have gone out the door with the economy. Fewer funders are willing to fund long shots. With less funds to be distributed, donors want to have a certainty that their dollars are making a difference.

If you find your organization may be in this situation, it is time to consider “Plan B.” A growing number of organization’s “Plan B” seems to include finding an organization with a similar mission and joining forces (which will be the topic of our next Bottom Line article).

The declining economy has upset another long-standing notion that organizations cannot appear too financially healthy. The healthier the better (within reason—see paragraph below). To differentiate the “healthy” from the “not as healthy” organizations funders may perform a trend analysis, placing the three most recent years of financial information side by side to see the increasing or decreasing trends in revenue and expenses.

A decreasing trend in financial support could indicate that the nonprofit will be unable to sustain itself in the future. Or, if program expenses are growing at a faster rate than fundraising expense, the nonprofit could be experiencing some inefficiencies or mismanagement.

But there is still such a concept as being too successful. Many funders will examine your organization’s accumulation of unrestricted net assets. A successful not-for-profit that can make a case for donor dollars will be those that avoid accumulating an excess of unrestricted funds that otherwise could be directed toward program services.

According to BBB guidelines, a nonprofit’s unrestricted net assets available for use should be no more than three times the size of its past year’s expenses. But prevailing rules of thumb also make it important that unrestricted and temporary restricted net assets be no less than, or approaching, the organization’s expenses.

The Image You Present
In short, it’s in the best interest of your organization to understand what the numerical information on financial statements and Form 990 can represent to funding organizations, individual contributors and others in the public domain. The image you’re presenting to possible “suitors” can draw them in or send them running.

April 12, 2012

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