How to Evaluate the Financial Statements of Non-Profit Organizations

Volunteering can be a good way to evaluate a non-profit's mission.

Most nonprofit organizations are required to make their financial reports to the government available to the public. Donors and anyone else can use these reports to ensure that money given to a non-profit is used to support its mission -- and not the salaries of professional fundraisers or a bloated management. The form that is publicly available is called the 990. Charities must make their three most recent filings available for inspection at their offices -- failure to do so can jeopardize their non-profit status. Additionally, the 990 may be available on the Internet.

Things You'll Need

• Form 990 for a charity for the past three years.

Instructions

1. Evaluate activities. Go to the section of Form 990 marked "Statement of Activities." This section breaks down a charity's expenses according to three categories. Program expenses detail how much a charity spends on program beneficiaries. Fund-raising expenses describe the amount of money a charity spends raising money. In the administrative expenses category, you'll find information on the amount spent for administration, business management, accounting and and record keeping. Compare these expenses. According to Charity Navigator, most non-profits spend 75 percent of their money on program services. To find out what percent your non-profit spends on program expenses, divide program expenses by total expenses.

2. Figure out whether the charity is growing or shrinking. On line 12 of the 990, you will see a line called total revenue. Armed with several years of 990s, find out whether the organization is seeing an increase in revenue year after year. Then compare that growth with management expenses found on the Statement of Activities. Are they growing at the same rate? Are salaries rising while overall revenue is not? If so, you may need to talk to management at the charity to figure out why.

3. Evaluate management pay. Salaries at large non-profits can be higher than you expect. Managers can oversee millions in assets and grants, and while non-profits may pay less than the private sector, they are going to be in that ballpark. Wages of directors, certain executives and key employees are reported in the 990. You can compare salaries to those of similar non-profit organizations. Compare salaries in like-sized organizations by comparing revenue. Compare salaries that have similar missions. Hospitals may pay more than literacy organizations.

4. Look for red flags. The 990 has all sorts of mandatory disclosures that could contain red flags. Non profits should disclose whether an employee is related to an executive. They must also disclose relationships with key vendors, which could uncover cosy relationships with for-profit companies. Evaluate whether members of the board of directors work for companies that do business with the nonprofit.

5. Pick up the phone. If you are considering donating to a charity, but are concerned about what you have seen in its financial data, ask the charity about it. But remember to check its answers with other experts, including your accountant, a regulator, or a lawyer.

References

• National Assembly of State Arts Agencies: Evaluating Non Profits
• Charity Navigator: Evaluating Charities Not Currently Rated by Charity Navigator
• Bureau of Labor Statistics: Wages in the Nonprofit Sector
• Florida's Blood Centers blood bank: Anne Chinoda close to resigning as blood bank chief" Tracy, Dan. Orlando Sentinel.