As a donor, your desire to ensure that your contributions are making a meaningful difference is commendable. Understanding a charity’s financial health through its Form 990 can provide invaluable insights into its operations, efficiency, and overall mission alignment. This page will guide you through how to effectively read and analyze a Form 990, equipping you to make informed choices regarding your charitable contributions.
Wheels of Change believes in the importance of transparency and accountability. By taking the time to review Form 990, you can assess essential details, such as program expenses, executive compensation, and governance structure. This knowledge not only validates your giving but helps you contribute to charities that align with your values.
Step-by-step walkthrough
Access Form 990
Retrieve the charity's Form 990 from platforms like ProPublica Nonprofit Explorer or Candid GuideStar. These sources make annual tax returns of nonprofits publicly available, helping you gain reliable insights into a charity's financials.
Review Part I Summary
Begin with Part I of Form 990, which summarizes the charity's mission, revenue, and expenses. This section provides a high-level overview of the organization’s operations, helping you gauge its scale and focus areas.
Analyze Part IX Functional Expenses
Dive into Part IX to examine the breakdown of functional expenses. Here, you can find the program expense ratio, which ideally should exceed 75%. This ratio indicates how much of the charity's funds are directed toward its mission versus administrative and fundraising needs.
Check Schedule J for Executive Compensation
Look at Schedule J to understand executive compensation. Compare salaries against the charity’s size and revenue. High executive pay in relation to mission accomplishment may raise questions about priorities.
Examine Schedule L for Related-Party Transactions
Review Schedule L for any related-party transactions, which can indicate potential conflicts of interest. If you spot any, consider the implications for the charity's governance and integrity.
Cross-Reference and Compare Year-Over-Year
Compare current Form 990 data with previous years to identify trends in expenses, revenue growth, and program effectiveness. This can help you assess the charity's trajectory and consistency in fulfilling its mission.
Positive signals (green flags)
✓ High Program Expense Ratio
A program expense ratio above 75% signifies that the charity is likely using a significant portion of its resources for direct mission-related activities, reflecting well on its efficiency.
✓ Consistent Growth Trajectory
Year-over-year revenue growth can point to a successful fundraising strategy and effective mission execution, indicating stability and positive impact.
✓ Transparent Executive Compensation
Clear and reasonable executive salaries detailed in Schedule J can reflect an organization's commitment to attract qualified leaders while maintaining accountability to its mission.
✓ Active Board Governance
An engaged and diverse board, as indicated in Form 990, is essential for good governance. Active oversight can ensure the organization remains aligned with its mission and ethical standards.
Warning signals (red flags)
⚠ Low Program Expense Ratio
If a charity shows a program expense ratio below 75%, it may not be effectively utilizing donations to support its mission, raising concerns about efficiency and priorities.
⚠ High Executive Salaries
Excessively high executive compensation compared to the charity’s income suggests potential misalignment between the organization’s goals and financial management, which could affect donor trust.
⚠ Self-Dealing Transactions
Related-party transactions flagged in Schedule L could indicate self-dealing, where executives or board members benefit financially from the charity's operations, raising ethical concerns.
⚠ Lack of Transparency
If a charity is difficult to locate on resources like ProPublica or fails to provide clear financial information, it may indicate an unwillingness to be transparent with donors.
Tools + resources
- https://www.propublica.org/nonprofits
- https://www.guideStar.org
- https://www.charitynavigator.org
- https://apps.irs.gov/app/eos
- https://www.bbb.org/charity-reviews
- https://www.501c3.org
Atlanta state-level oversight
In Atlanta, the Georgia Secretary of State maintains a charitable registry where you can verify the legitimacy of local nonprofits. The Better Business Bureau (BBB) provides charity reviews specific to Georgia, helping you make informed decisions. Additionally, the Georgia Center for Nonprofits offers resources and support to enhance nonprofit effectiveness and transparency, benefiting both organizations and donors alike.
FAQ
What is Form 990?
Why should I review Form 990 before donating?
How can I access Form 990 for a charity?
What are the key sections of Form 990 to focus on?
What is a good program expense ratio?
What should I watch for in executive compensation?
What does Schedule L indicate?
Other donor-verification guides
As a discerning donor, you have the power to make informed decisions that impact your community positively. By taking the time to analyze Form 990, you can ensure that your donations to Wheels of Change are directed effectively toward meaningful change. Empower yourself with knowledge and verify before you give!