As a thoughtful donor, you want to ensure your contributions are making a meaningful difference. Understanding a charity's financials is essential for making informed decisions. One of the best ways to assess a nonprofit's health is through their Form 990, their annual tax return, which is publicly available.
This page will guide you through reading the Form 990, including key sections that reveal how funds are utilized, the charity's governance structure, and potential issues that may signal red flags. With this knowledge, you can support charities that align with your values and ensure your donations are being used effectively.
Step-by-step walkthrough
Retrieve the Form 990
Visit Candid GuideStar, ProPublica Nonprofit Explorer, or the charity's official website to find their most recent Form 990. It’s crucial to start with the latest data to get an accurate picture of the charity’s financial health.
Read Part I: Summary
Part I provides an overview of the charity's mission, activities, and financial data. Pay attention to the total revenue and expenses, as well as the assets and liabilities, to gauge the charity's financial standing.
Analyze Part IX: Functional Expenses
This section breaks down expenses into program, administrative, and fundraising costs. A well-run charity typically allocates 75% or more of its expenses to program services. Compare these ratios to assess the charity's efficiency.
Check Schedule J: Executive Compensation
Schedule J details how much the charity pays its executives. High salaries compared to the charity's size and mission could raise concerns about whether funds are being used effectively. Cross-reference these figures with similar organizations.
Review Schedule L: Related-Party Transactions
Look for any related-party transactions that may suggest conflicts of interest or self-dealing. These can be red flags, indicating that a charity might not be prioritizing its mission.
Positive signals (green flags)
✓ High program-expense ratio
A charity that spends 75% or more of its budget on program services demonstrates a strong commitment to its mission and responsible fiscal management, which is a positive indicator for donors.
✓ Transparent executive compensation
Clear and reasonable compensation for executives, relative to the charity’s size and mission, reflects transparency and a focus on effective governance, reassuring potential donors.
✓ No related-party transactions
A lack of related-party transactions indicates that a charity values integrity and is likely to prioritize its mission without conflicts of interest, which is reassuring for donors.
✓ Consistent revenue growth
A charity showing stable or increasing revenue year-over-year suggests an effective fundraising strategy and strong community support, indicating a healthy organization.
Warning signals (red flags)
⚠ Low program-expense ratio
If a charity allocates less than 75% of its expenses to program services, it may signal inefficiency or mismanagement of funds, which is a significant concern for donors.
⚠ Excessive executive compensation
Executive salaries that are disproportionately high compared to the charity's revenue and mission may indicate a lack of transparency and priorities that do not align with the organization's goals.
⚠ Related-party transactions
Transactions between the charity and individuals or organizations associated with it can be problematic. Self-dealing raises questions about the charity's integrity and commitment to its mission.
⚠ Year-over-year declines in revenue
If there is a consistent decline in revenue over multiple years, it could suggest a struggling organization, which may affect its ability to fulfill its mission effectively.
Tools + resources
- https://projects.propublica.org/nonprofits
- https://www.guidestar.org/
- https://apps.irs.gov/app/eos
- https://www.charitynavigator.org/
- https://www.bbb.org/charity-reviews
- https://www.anf.org/
Rhode Island state-level oversight
In Rhode Island, you can further verify charities by checking the state’s Attorney General’s Charitable Registration page, which lists registered nonprofits. The Better Business Bureau (BBB) provides additional information on charity reviews. For more resources, the Rhode Island Nonprofit Association offers support and guidance for both nonprofits and donors, ensuring a more informed giving process.