By Angela Bevacqua, Senior Communications Specialist
We’re back with the second half of our discussion about how to read Form 990. Our first blog explained the purpose and value of Form 990 and how the summary page can give us a quick snapshot of a nonprofit’s financial health. Now we learn how to dig a little deeper.
Q: Beyond the Form 990 summary page, what other sections can help a donor evaluate a nonprofit’s financial health?
The most common areas that are relevant to donors are:
Part VI: Governance, Management & Disclosure
- Sections A & B. These sections are a series of questions about a nonprofit’s board of directors and its policies. Section A discloses how the nonprofit is managed and governed. Section B discloses the policies the board has adopted. Many of the policies referenced, such as a Conflict of Interest policy, are considered best practices for nonprofits operations.
Part VIII: Statement of Revenue
- Types of Funding. This section tells you how an organization is funded, such as through membership dues, events, government grants, program services, and investments. Evaluate the proportions of these sources and ask yourself if you think the organization can sustain major changes in any of these areas. Generally, multiple sources of revenue is a sign of good financial health because the organization isn’t relying on just one source of revenue.
Part IX: Statement of Functional Expenses
- This section identifies where the organization spent its money. Take a closer look at anything inconsistent with the type and amount of expenses you would expect for the organization to fulfill its mission.
- Program Expenses. Generally, watchdog groups say a nonprofit should spend about 65 percent of its expenses on programs and 35 percent on administrative overhead and fundraising costs combined. However, this ratio depends on the nature of the nonprofit’s work, its location, sources of revenue and more. It can help to compare organizations of similar size and mission to get a sense of typical ratios. Nonetheless, financial ratios can provide insights, but do not measure the organization’s impact.
- To calculate these percentages, take the total from Column B (Program Service Expenses) and divide by Column A. Then multiply by 100 for the percentage of expenses spent on program services. Next add the totals for Columns C & D (Management & General Expenses and Fundraising Expenses), divide by total expenses, and multiply by 100 for percentage of expenses spent in these areas.
- On Line 19 from Part I: Summary, revenue less expenses, a positive number will indicate that the nonprofit brought in more revenue than it spent, commonly called “in the black.”
- Finally, supplemental Schedule O is a nonprofit’s opportunity to elaborate on their financial numbers and activities in narrative form. This section may shed light on questions that may arise from reviewing the numbers alone.
We hope this overview gives you the confidence to tackle the Form 990 and feel good about your donations. For more information, visit these resources: