What do donors look for in nonprofit financial reporting?

Many nonprofit organizations have questions about measuring their success.
Date Published
05/30/2014

What information intrigues donors when they’re looking to establish or maintain their relationship with a nonprofit group? A number of charitable organizations have made use of nonprofit management software to keep thorough and easily accessible records of their fundraising and overhead costs and revenue. This helps not only keep internal stakeholders, including staff and board members, on the same page but also gives donors and other supporters a clearer picture of where their contributions end up. However, many other organizations are left wondering what information is most important to donors and how they can go about measuring success.

What stories can financial statements tell?
The law firm CliftonLarsonAllen specializes in providing services to nonprofits, private business owners and individuals, and it suggests a financial analysis doesn’t necessary reflect the success organizations experience. The law firm said that many donors refer to charity rating companies like Guidestar, which rate groups based on their financial records provided by IRS documents. These help inform donors as to how a nonprofit generally distributes its fundraising revenue. CLA suggested this approach doesn’t provide accurate view of a nonprofit’s ability to tackle their core mission. By only looking at expenditures alongside income generated through giving events – in other words, a profit and loss sheet – donors are taking an approach closer to investors looking at a for-profit enterprise. Even a philanthropic group with a slim profit margin and high back-office expenses can have a profound impact on its given mission.

What’s the most important metric?
Similarly, a recent blog post for the Chronicle of Philanthropy emphasized the importance of measuring outcomes instead of individual activities. The Chronicle draws a distinction between the two ideas, identifying activities as the actions a nonprofit performs, which include providing training, teaching and conducting research. Without question, these are crucial steps and are ultimately part of the process that leads organizations to create strategies that will produce the outcomes that donors are looking for. The results can be defined by verifiable changes in conditions, behavior and status, explained the Chronicle. Outcomes tied to individual constituents and others connected to broader institutional changes vary in importance based on a nonprofit’s overarching goal. A charitable group that aims to help lift a certain number of individual above the federal poverty line will likely target individuals and families, while another organization that wishes to change federal requirements for affordable public housing – which can also impact people living in poverty – probably has its sights set on creating systemic change.

Nonprofit organizations are obligated to prove their value, partially due to governmental regulations, but also because donors want to be confident in their decisions to contribute to giving campaign. It’s important to remember that financial statements alone don’t always give contributors everything they need to know as they make donation decisions. By making use of nonprofit management software, organizations can keep greater visibility of their financial status as it pertains to the effect of fundraising efforts and use the information to keep donors in the loop.

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