I am constantly amazed when I see nonprofit organizations that work so hard to define themselves in terms of quality, artistry and customer service, simultaneously pay insufficient attention to opportunities to communicate about their organizational mission and infrastructure when completing the IRS 990 Tax Form.
It is no secret that many folks in the nonprofit world are unfamiliar and uncomfortable with finance and accounting principles. Not as widely understood is that many accountants and accounting firms are not suitably familiar with nonprofit concepts. Just as you probably don’t want an accomplished orthopedic surgeon to perform your heart surgery, an accountant who specializes in small businesses does not necessarily have expertise in the nuances of nonprofit issues.
I recently spent an afternoon reviewing the 990’s of 40 music-related organizations with budgets between $800,000 and $1,800,000 in an effort to provide a client some benchmarking data. Among this pool were people who missed opportunities to sing their own praises and were ignorant of the managerial and fiduciary weaknesses (and sometimes misinformation) their 990’s exhibited for all to see.
There are sections on the Form 990 where you can brag about your accomplishments, yet nonprofits leave this important opportunity to market themselves to their accountants! For example, Part 1 of the form asks you to “describe your mission or most significant activities.” The form does not ask for your mission statement; it offers you the opportunity to editorialize! Smart organizations recognize that the audience is not just the IRS, but also potential foundations, individual donors, future employees, and interested members of the general public. They use this space to tell their reason for being.
The same is true in Part 3, question 4, where you are asked to describe accomplishments in your three largest program service areas. Again, you have the opportunity to brag, to explain your strengths (and perhaps defend weaknesses) but many leave it to their accountants to answer this question. Is your accountant really the best person to describe your value in the community? Do they know how many people you served? What kinds of transformative experiences you created?
And then we get to the ugly stuff, which could raise red flags: Part IX of the form, the Statement of Functional Expenses, in which organizations are supposed to indicate how much of their expenses fall into the categories of Program Services (the mission work); Management and General Expenses (the stuff you do to keep the lights on and the paychecks written); and Fundraising Expenses (the money you spend to raise money). The rules on how to make these allocations are quite liberal and allow organizations to largely define their own allocation processes (such as hours spent or square footage allocable, etc.). There is a fear that allocating too much to Management and General or Fundraising will act as a red flag for funders and others, so organizations have every incentive to understate these costs.
Of the 40 organizations I looked at, four of them (10%) reported zero fundraising costs! Yet these same organizations reported fundraising income between $320,000 and $570,000 despite not spending one penny on fundraising!!! Even if these folks are raising money by standing under money trees, I would argue that the staff shaking the tree and collecting the money as it fell should have some of their time allocated to fundraising. I think they have accountants who don’t know much about nonprofit accounting and that their managements and Boards are not fulfilling their professional and fiduciary roles, and I would hope they clean it up before a regulator comes to ask questions. If I were a potential donor in their community, I would certainly be concerned, and as an advisor to donors I would not recommend these organizations.
This is why it really pays to understand your 990 and use it to your advantage.
David Gray is President of the consulting firm Finance Arts, LLC, and author of the Finance Arts Guide to Nonprofit Cash Flow, published in 2010. He teaches nonprofit finance at Brookdale Community College and is a frequent speaker on nonprofit finance and management. In addition to being a Certified Financial Planner, he has twice served as Executive Director of nonprofit organizations. David is host of NonprofitNJ, a television program that explores issues which impact nonprofit organizations. A graduate of Johns Hopkins University, David and his family live in Princeton, NJ.