Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back once again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Thanks, Jen. It’s nice to be here.

Jen: So, we’ve talked before about the Donor Bill of Rights and how it really wasn’t a legal thing for nonprofits to follow, but I know there’s organizations out there that are considered “watchdogs.” Can you tell us a little bit about some charity watchdogs?

Annjeanette: Charity watchdog organizations are out there, and they’re basically on the Internet and such. And they’re out there to provide donors information. A lot of nonprofit organizations have tax filings and financial information that’s already made available to the public, and these watchdog organizations basically make that information available in one spot for donors to look at.

Jen: So, kind of like a search engine for charities?

Annjeanette: Basically yes.

Jen: What are the main charity watchdogs that people typically go to?

Annjeanette: There’s three that come to mind. So, first of all, there is Charity Navigator, and Charity Navigator is pretty popular. They basically collect tax returns, copy of tax returns and financial information, as well as annual reports that nonprofit organizations might have on their websites. And what they do is they take that information, analyze it and provide a star rating. So, they have a star rating system, and they have a formula that goes behind their star rating system.

And then there’s Charity Watch; Charity Watch is very similar. They get financial information, tax return information that’s already out there to the public collected, and they have their own method of rating organizations and they provide a letter rating A through F.

And then there’s GuideStar; GuideStar doesn’t necessarily analyze a nonprofit organization’s performance. What they do is they’re just a repository for information: the tax returns, financial reports, annual reports, things like that. But what they do have is a seal of transparency rating that they provide each organization based on how much information the organization itself voluntarily provides to customers.

Jen: So, you’ll want to kind of maybe look at all three but then also do your own due diligence as just part of when you’re making a decision whether or not to contribute to a not-for-profit.

Annjeanette: That’s correct. The important thing for nonprofit organizations to know is that these watchdog organizations are out there, and so, it’s important for the nonprofits to understand what they’re looking at, what the grading methodology is and what the donors are seeing from that aspect of it. That way when they field questions from potential donors, potential supporters they’re aware of what’s out there, and they can respond appropriately.

Jen: Well, that’s good to know. Perfect, we’ll get you back to talk a little bit more.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

In the not-so-distant past, charity watchdog groups such as GuideStar, Charity Navigator and the Better Business Bureau’s Wise Giving Alliance were notorious for giving overhead ratios significant weightings in their rankings of not-for-profits. While such a practice can help potential donors weed out spendthrift organizations, it also tends to unfairly penalize not-for-profits making reasonable expenditures for current needs and strategic investments for the future.

In recent years, not-for-profits have been urged to put more focus on transparency, governance, leadership and results. For many not-for-profits, funders and watchdog groups, “impact” is now the primary measure of an organization’s effectiveness. If it hasn’t already, your not-for-profit needs to ensure that it has made the necessary cultural changes and communicated the importance of impact to its supporters.

Possible Challenges
“Impact” generally is defined as the long-term or indirect effects of measurable outcomes (such as the number or percentage of individuals served). It typically refers to broader societal change and can be much less predictable than outcomes.

Hopefully, most of your donors may now use such impact-based yardsticks as “What difference does this organization make in our community?” But. while such a shift of perspective is good news, it may mean that your not-for-profit needs to make some cultural changes — including at the board level. For example, you might have to convince your board that spending more on such items as executive salaries and marketing programs will produce better outcomes and broader reach over time.

Communicating with Stakeholders
Although there’s no proven relationship between overhead and a not-for-profit’s effectiveness, some donors, funders and members of the public continue to use not-for-profit expense ratios to compare organizations. Communicating the value of impact can be challenging.

One practical solution is to revise such publications as your annual report. Compliance with Generally Accepted Accounting Principles requires not-for-profits to report costs in one of three functional categories — program services, general and administrative, and fundraising. But there’s no reason why you can’t provide supplemental financial statements or break out administrative items to tell how they were used to enhance programs and ultimately affect lives.

Advice for Change
If you’re unsure about how much your not-for-profit should spend on overhead and how it can best deploy resources for meaningful impact, contact your accountants. Times are changing — for the better — and your organization needs to change with them.