End-of-Year Giving

It is that time of the year again! We are coming to the end of 2017 and we are preparing for the New Year. Many of us are thinking about who we want to be and what we want to achieve in 2018. We are also pondering about the values that are most important to us and, as a natural extension, the causes that matter to us most that we want to donate to. For some of us, we want to help the most vulnerable, so we seek out nonprofits that provide services to children, the homeless, the less fortunate, the sick, or the elderly. Others feel a strong desire to help to improve the quality of our society by supporting organizations that work on education, the arts, or the humanities. Others amongst us want to support causes that advance research and development across various fields, including STEM or the social sciences. Others are drawn to grassroots efforts so they focus on issue-specific advocacy initiatives for issues like the environment, healthcare, community organizing, immigration, and the federal budget.

The biggest challenge that donors face when trying to donate to a cause is selecting the right organization. It is easy to become overwhelmed when there is such a large volume of nonprofits that do so much good work. There are also many off-putting stories in the news about nonprofit executive directors who receive excessive compensation, as well as rumors about corrupt practices. This, of course, raises concerns about donated dollars not reaching the intended population and going toward administrative costs or paying for workers’ salaries.

Nonprofits Use Donations to Further the Mission

Despite media coverage that suggests a widespread problem with corruption and mismanagement in the nonprofit field, the Association of Certified Fraud Examiners (CFE), in its  2012 “Report to the Nations on Occupational Fraud and Abuse”, a Global Fraud Study, found that fraudulent activity at nonprofits (10.4%) is far less extensive than it is in business (39.3%) and government (16.8%). Nonetheless, the nonprofit sector has responded to such concerns with varying professional codes of ethics and guidelines that describe best practices in various areas of nonprofit management. In the United States, organizations like the National Council of Nonprofits have partnered with many state associations to develop these guidelines.

Nonetheless, the fear from donors that donations will be mismanaged is so great that numerous websites have surfaced hoping to help steer would-be donors toward high-functioning nonprofits. Unfortunately, these websites often use misguided indicators for identifying ethical organizations, such as low administrative costs and high-efficiency rates. These types of benchmarks are misguided and inappropriate because they do not tell you whether an organization is working towards its mission. 

I think it is important to clarify that, more often than not, the concerns regarding administrative costs and high salaries are either misinformed or unwarranted. Even if a portion of the money from a donation goes towards administrative costs or salaries, that donation is still contributing to the advancement of an organization’s mission. How can this counterintuitive statement be true? It flies in the face of everything you have heard about nonprofits in the media. After all, administrative costs and salaries (especially executive salaries) are continuously vilified. Furthermore, many foundations, donors, government funders, and corporate supporters place caps on these costs for two principal reasons: to ensure nonprofits are functioning efficiently, and to steer the funding toward the intended population or cause. In reality, though, this kind of thinking, although well intended, is greatly flawed. Furthermore, it has caused great harm to the nonprofit sector as a whole by slowly undermining the organizational systems that are needed to ensure fiscal integrity and that services operate with quality standards. This has given way to the well-documented phenomenon known as the “ Nonprofit Starvation Cycle.”

The aversion to paying for administrative costs has led nonprofits to have fewer resources to invest in infrastructure because the funds must go primarily to programs. The inability to invest in the organization, in turn, undermines the very systems that protect organizations from mismanagement and inefficient practices. Lower investments in administrative costs result in fewer internal controls; less qualified staff; underpaid staff and higher turnover rates; underpaid employees; a reduction in services; and an environment in which it is easier to commit fraud. Furthermore, nonprofits also struggle to cover all of their costs like rent or mortgage, electric and gas bills, and insurance because these often fall under the category of administrative costs.

Nonprofits Focus on Outcomes

There are multiple factors that donors should look at when selecting a nonprofit organization to donate to. Before anything else, though, donors should be clear on what they want to achieve and then select an organization that is most aligned with their vision.

• Consider the size and capacity of the organization. The size of an organization can influence how missions are carried out and what populations are reached. Although in this section I will be focusing on small, mid-size, and large nonprofit organizations, there are many variations in sizes. Also, when you compare organizational budgets, you must compare nonprofits in a similar field.  For example, a $5 million dollar organization that runs 24-hour facilities is small for that industry. A $20 million dollar budget for a social service agency translates into a large nonprofit.

  1. Small nonprofits: If you want to donate to an organization that is focused on harder-to-reach populations, is more likely to be entrepreneurial with its programs, and is mostly operated by members who are directly from the community, then you should donate to a smaller nonprofit. What you must be aware of, though, is that in smaller and grassroots organizations, there are less formalized systems and fewer internal controls because staff, including the executive director, have to play both administrative and programmatic roles. These organizations are also typically driven by a very charismatic leader with a strong connection to the mission. The other staff and board members in the organization are also very connected to the mission.

  2. Mid-sized nonprofits: If you want to give to a cause that is focused on enhancing programs to further quality over innovation or entrepreneurship, a mid-sized organization is your best bet. The organization and its management still have a connection to the mission but have stronger systems that are more bureaucratized with greater centralization and procedural controls.

  3. Large nonprofits: You should donate to a large nonprofit if you want to give to an organization that has a strong foundation of professional staff, robust protocols, and can maximize its economies of scale and scope. The larger an organization, the more bureaucratic it is going to be as well as top-management heavy. These organizations are able to focus on systematized programs with uniform implementation across the board. They are also able to reach larger numbers of people. However, they do not necessarily maintain the connection to the community that smaller institutions do. Furthermore, the staff often feel separated from the mission because of bureaucratic organizational requirements. Also, they are less likely to hire members from the community in upper management.

• Consider if you want to make a long-term impact or a short-term impact. If you want to make a long-term impact that helps nonprofits grow and expand, consider giving towards initiatives that will make the organization you care about sustainable. Donate to initiatives like unrestricted funds, reserves, annual campaigns, capital campaigns, or an endowment fund. You can also consider a legacy gift (e.g., charitable bequest, gifts of life insurance, gifts of real estate, gifts of listed securities, charitable annuities, or charitable remainder trusts). These funding sources will help to build the safety net for the organization, allow it to build infrastructure, and help it survive the ups and downs of the nonprofit funding landscape. If you want to donate to a specific population in an organization (but are not as interested in the other areas an organization is working on) or a specific issue you care about, you can make a donation that specifies that you want to support a specific campaign or program. Please do not stipulate that your donation should not cover administrative costs because at that point, you will limit the impact of your gift to the organization by hindering the implementation of quality and fiscal controls.

• Consider the impact of the programs instead of low administrative costs. Nonprofit organizations take on complicated issues that are not easy to solve. Poverty, the environment, abuse, trauma, housing instability, human trafficking, and other issues taken on by nonprofits are, by their very nature, not profitable, easy to address, or easily quantifiable. Interventions can often take years to make an impact on each individual. They also require customized benchmarks based on the symptomology or circumstances of each individual. Thus, short-term and long-term goals are needed to truly gauge whether there is progress being made across a continuum of time. This, incidentally, is also the case for nonprofit organizations that aim to further the arts, the humanities, research and development, and grassroots advocacy efforts. Thus, exclusively using administrative costs as a measure of quality in a nonprofit is misguided because this benchmark provides no insight as to whether an organization is doing what it is supposed to be doing. Donors should instead look at whether the organization is achieving its objectives. This can be achieved by doing some investigative work. One source of information is the annual report, which should outline what each organization has achieved in the past year. Small nonprofits are less likely to have an annual report because the staff members are likely to be overtasked and work directly in the community. For these organizations, donors should consider inquiring about the organization’s accomplishments for the past year and crosschecking with the 990s. Irrespective of its size, an effective organization should have a culture that is outcome focused. This entails planning for achieving goals and measuring outcomes with an eye toward continuous improvement and mission attainment.

• Consider whether the organization implements sufficient accountability practices that serve as preventative measures against corruption and mismanagement. Thus, the nonprofit should embrace a culture of accountability in the form of rigorous accounting and programmatic standards, compliance, fiscal, and standard operating procedures. Best practices should be implemented and monitored in nonprofits in the areas of governance, transparency, fundraising, mitigating conflict of interest, ensuring financial accountability, and maximizing programmatic accountability. You should also look at the audits to gain insight into the organization’s internal controls and its application of Generally Accepted Accounting Principles (GAAP). 

In the end, most nonprofit organizations are staffed with incredibly dedicated professionals that aim to make this world a better place. These civic-minded organizations are trying their best and need individual donations to make sure they continue to strive toward achieving their mission. Thus, if you are thinking about giving to a good cause this year, please consider supporting a nonprofit organization whose mission is aligned with your values and ideas. If you are concerned about potential mismanagement, make sure you target organizations that are outcome focused and implement accountability practices.

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