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Financial Transparency and The Road to Donor Happiness

Tuesday, May 6, 2014

Financial transparency in the nonprofit community has been a major talking point for several years. Advances in technology, and a focus on fraud continue to raise donor expectations on the subject. They not only want confirmation that their donations are being utilized to assist the causes they are passionate about, they also want to know that your organization is honest and stable.

What is Financial Transparency?

According to Dave Manuel, Financial Transparency “means making information as accessible as possible” and that you are “being honest about your performance, even when it is subpar.” It relates to how open your organization is to willingly offer financial information to the public. 

A transparent organization voluntarily allows their financial, operational, and program documents to be inspected by the public. This requires your organization to adopt clear accounting methods and record keeping, adhere to the federal and state regulations that govern nonprofit organizations, and submit reporting documents in a timely, efficient manner.

Defining its importance

As a nonprofit, you were created to provide a service to the public. Donors and the public want to see that your organization is following its mission and providing those services with as much benefit as possible. Initiating and maintaining financial transparency enhances how the public perceives your organization. Russell Leffingwell, a founding member of The Foundation Center, stated in 1956 that “’foundation[s] should have glass pockets,’ so that anyone could easily look inside foundations and understand their value to society, thereby inspiring confidence rather than suspicion.” Inspiring this donor confidence could be the difference between a gift and someone simply interacting with your website

Glasspockets, a subset of The Foundation Center, cultivating transparency will “strengthen credibility, increase public trust, improve grantee relationships, and build a community of shared learning and best practices.” As a website dedicated to broadcasting transparency, they understand the public interpretation of transparency better than most./p>

Transparency and technology

The creation of the internet resulted in a globally connected public. As a result, sharing financial data has become so simple as to be almost effortless.  In, The Truth About Transparency by Paul D. Meyer, he states that “technology has both created the expectation and also produced the tools to deliver greater organizational transparency. Access to information through the Internet has shifted the balance of power toward the customer rather than the supplier.” Due to ease of use, global connectivity, and the fact that the internet has been dominating our culture for almost twenty years, donors no longer accept that your organization doesn’t know how to display financial information on its website. Not providing such information can lead the public to believe you are reticent to do so because you have something to hide.

 

Despite the connotations associated with a lack of financial information, according to Blackbaud, “recent studies indicate that well over 97% of nonprofits have some type of Web presence, and…just over 26% of respondents do not have a copy of their IRS Form 990 available on their Web site or readily available for donors.”  That’s more than a ¼ of the nonprofit community that is not displaying transparency with current and future donors, according to Guidestar, this could lead to a loss of $15 billion in charitable donations.

 

The road to transparency

As we’ve discussed, when an organization is transparent they are seen as being more trustworthy, resulting in donors that have heightened faith in your cause. That faith leads to a confidence that is reflected in their giving.  So where does your journey to transparency begin

Step 1: Determining your transparency

As an advocate for transparency, Glasspockets has scoured the interwebs and determined 23 components that ultra-transparent organizations possess. Begin by reviewing this list of indicators to determine if you are operating a transparent organization.

Step 2: Addressing your faults

Once you’ve used Glasspockets’ checklist, begin assessing the areas where your organization can improve. You can review Joanne Fritz’s “6 Actions You Can Take to Make Your Nonprofit More Transparent,” despite the long winded title, she offers some great, short tips to get you started.

Now is also a good time to review your internal controls.  Internal controls act as the foundation of sound financial management, ensuring that transactions are authorized and recorded properly. As a financially transparent organization, you’ll want to guarantee that the numbers you are sharing are correct. Effective internal controls will help ensure you have reliable financial information. To get you started, read Building Effective Internal Controls by Nancy Church for some helpful suggestions.

Step 3: Calculating your overhead

Overhead is the calculation of spending on administration/management and fundraising versus the spending on programs/services. Typically nonprofits would like to keep their overhead costs to less than 30%. Despite the varying opinions that overhead  should not matter to donors, it is often the case that higher overhead can affect donor opinion.  A higher overhead can be a red flag that your organization is spending a greater amount on administration/management and fundraising expenses and less on the programs that benefit your cause. High overhead can also affect your ability to qualify for certain grants, so it is best to know where you stand.

Step 4: Filing and displaying your 990

To be transparent (and follow federal regulations), filing the IRS Federal Form 990 is necessary and allows the public to see on what and where your organization is spending its funds. By looking at the Form 990, funders and donors can examine your overhead expenses, your sources of income, and how much you spend on programs.

In the case of the 990, you are also required to make filings available to the public for review. Something many organizations are doing directly on their websites. Hurwit & Associates suggests using this to your advantage, “use the [990] to describe your services to the public. For instance, you can include in IRS Annual Return Form 990, Activities Sections III and VIII, a description of how your organization is fulfilling its mission.

Finding inspiration

If you get stuck, run out of steam, or need a little inspiration, Charity:Water is an example of an organization that does transparency very well. They’ve taken the bold stance that 100% of their donations will fund their clean water initiative, and they’re willing to prove it. They have an easy to find link to their financials under their “about us” tab. Within this tab they list annual reports, salary surveys, audit reports, and their form 990 for the last seven years.

Highlight your transparency

Once you’ve put in the difficult work to become financially transparent, and you possess all 23 components of a transparent foundation, announce it to the public by joining the other 63 foundations that have glass pockets.

Extra Credit

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