Let me start by saying that this is NOT a how-to session. I’m not here to go line-by-line through the 990 and show you how to fill it out. If you’re in need of assistance with completing your 990, my team and I would be more than happy to assist you and can be contacted here.
My goal is for you to be able to take your Form 990 and turn it into something you would be proud to attach to a grant request or show to a potential donor. So let’s jump right in.
In the non-profit sector, requesting donations and requesting grants is a competitive process. The type of donors who are charitably-minded are becoming more sophisticated and want to know what their donation is going towards and what it is accomplishing. Most people, especially those that give large amounts of money, know about GuideStar.org, where one can go online and pull down the last three years of 990s for any Tax-exempt organization.
According to the National Center for Charitable Statistics, as of 2020, there are 20% more not-for-profit organizations than there were 10 years ago. Compare that with the private sector, where there are about 2% more private businesses than there were 10 years ago. So, not-for-profit organizations are proliferating at about 10 times the rate of the private industry. However, the pool of donor dollars isn't increasing all that much, which causes additional competition for limited resources.
To ensure we’re getting the most from our Form 990s, we will start with the basics. Yes, everything I talk about in this next section, no matter how basic it may seem, I have indeed seen it as an issue before.
It can’t be over-emphasized, first impressions are really important. If your writing has inconsistent fonts, missing information, blanks, a misspelled name, or grammar errors, that reader will assume that you take that same level of care in everything you do. It doesn't matter how good your programs are, how good your mission is or how well it aligns with the grant purposes. If they think you do things sloppily, it puts you at a disadvantage.
Now that we’ve got the basics down, we’ll turn our attention to the three pages of Form 990 that are of special interest to donors and grantors.
As a whole, the not-for-profit industry doesn’t do a great job at completing this page. Page two is where you list your top three program service accomplishments (PSAs) and how you use your resources to further your program and your mission.
This may be the one time in all of taxation where the IRS lets you brag on yourself and doesn't charge you tax for it. Share with your donors the reasons why you are worthy of their donor dollars. Tell the grantor how their money is going to be used, and what it's going to accomplish.
Common errors I’ve seen include being overly succinct; including just a handful of words, a copy and paste of the mission, or not being completed at all. Frequently, I see the organization communicate what it does, but not what it has actually accomplished. On the flip-side, I’ve also worked with a client that gave me a ten-page, single-spaced attachment to put on their 990 that went into excruciating detail about every little thing they did.
In this competitive sector, grantors have to review a ton of 990s and most won’t take an hour to read them in full. They skim, knowing where the important information will be, so you need to be taking advantage of the space that is given by using compelling language and featuring your organization’s accomplishments and how the donor’s money is going to be used.
In 2007, the IRS redesigned Form 990 to improve the governance section. This was the point in time where we opened up the paper and it seemed like there was a new high-profile fraud or mismanagement of funds within a national organization every week. The IRS believed a contributing factor was ineffective governance. So, it added a page to the 990 specifically addressing the structure of your board governance, policies you have in place, and how you manage compliance.
Part B of page six is a listing of board governance policies the IRS believes are important for effective governance. The IRS won’t come after you if you answer every one of these questions no, but if you do have these policies, you want to take credit for them. I don't know that there's ever been a time when these policies have been the sole determining factor on whether or not a donor gives. However, in a competitive grant situation where a grantor is trying to decide between organization A and organization B and, all else being equal, it looks like organization A has good governance and organization B has no governance, they will probably feel better giving to the organization that's better run.
Page ten of the 990 is where an organization lists all of its expenses into predefined categories. You also categorize your expenses into one of three buckets, program, fundraising or management, and general.
One of the most widely used metrics of how well an organization utilizes its resources is called the Program Ratio. This calculates how much out of every dollar spent is going to further your mission and your programs. The higher the percentage, the better. At a minimum, 75% should be your goal, as there are a number of grantors that that won't touch you if the program ratio is under 75%. Of course, 80% is better and 90% is great, but if you're too high, that could raise questions as to how you're allocating expenses. If you run your program ratio and see it is lower than it should be, it can mean one of two things: you’re not effectively using your resources, or it's time to re-evaluate how you’re allocating expenses.
You can watch my entire presentation, where I go into further detail, on the Brown Edwards YouTube channel. You can also download my Nonprofit Financial Ratios worksheet to quickly calculate statistics that will help you to better tell your organization’s story.