Follow the Money, Then Read the Form 990
The Military Community Nonprofit Industrial Complex
The Good, the Bad, and the Ugly
Day 3: Follow the Money, Then Read the Form 990
Few phrases can make a nonprofit nervous faster than:
“I looked at your Form 990.”
Which is unfortunate.
Because you should.
Not because every donor needs to transform into a forensic accountant after giving twenty bucks.
Not because every nonprofit is hiding something.
And definitely not because a Form 990 is a treasure map where, if you follow the numbers carefully enough, you eventually discover the secret offshore yacht.
Most of the time, you won't.
What you can find is useful information about how an organization operates, where its money comes from, where it goes, how leadership is compensated, what programs consume resources, and how the organization's finances change over time.
If you're donating money, volunteering significant time, joining an organization, recommending it to someone else, or trusting its advocacy, understanding a little about its finances isn't cynical.
It's responsible.
So today we're going to follow the money.
Without immediately assuming the money leads somewhere nefarious.
First: Nonprofit Does Not Mean Nobody Makes Money
We touched on this Monday, but it deserves repeating.
Nonprofit does not mean unpaid.
A nonprofit can employ people.
It can pay executives.
It can hire contractors.
It can purchase buildings.
It can pay for travel.
It can advertise.
It can hire consultants.
It can hold events.
It can invest money.
It can maintain financial reserves.
It can spend money on technology, insurance, accounting, legal services, fundraising, and administration.
None of those things automatically indicate a problem.
Nonprofit organizations still operate in the real world.
Apparently accountants, cybersecurity companies, insurance carriers, airlines, landlords, and software vendors remain stubbornly unwilling to accept “supporting the troops” as legal tender.
Professional organizations require professional infrastructure.
The question is not:
“Did they spend money?”
Of course they did.
The question is:
“Does the spending make sense for the mission, size, complexity, and results of the organization?”
Meet the Form 990
Many tax-exempt organizations file an annual information return with the IRS commonly known as Form 990.
Think of it as one window into the organization's financial and operational life.
Not the whole house.
But definitely a window.
Depending on the organization and filing requirements, these forms can contain information about revenue, expenses, compensation, governance, programs, fundraising, grants, assets, liabilities, and other activities.
They are public documents.
That matters.
Tax-exempt status comes with benefits.
Transparency is part of the deal.
Where Do You Find One?
There are several places to look for nonprofit financial information.
The IRS provides a tax-exempt organization search tool.
Organizations may also publish financial statements, annual reports, audited financial statements, and Form 990 filings directly on their websites.
Third-party nonprofit databases can make filings easier to find and compare.
When possible, look at the original documents rather than relying entirely on a rating, percentage, or somebody's social-media screenshot.
Because context matters.
A single number can tell a very convincing story.
Unfortunately, it can also tell the wrong one.
Don't Read Just One Year
This is one of the easiest mistakes to make.
You find a Form 990.
You see something interesting.
Screenshot.
Post.
Outrage.
Maybe wait a minute.
One year can be unusual.
An organization may have received a large one-time donation.
It may have launched a major program.
It may have purchased property.
It may have responded to a disaster.
It may have received a multiyear grant.
It may have undergone restructuring.
It may have paid unusual legal or technology expenses.
It may have experienced a major fundraising campaign.
That doesn't mean ignore unusual numbers.
It means look for patterns.
If possible, examine several years.
Is revenue increasing or decreasing?
Are expenses changing?
Is compensation growing significantly faster than the organization?
Are program expenses changing?
Are assets accumulating?
Is the organization repeatedly running deficits?
Did something suddenly shift?
One year gives you a snapshot.
Several years give you a story.
Revenue: Where Does the Money Come From?
Start with revenue.
Organizations can receive money from many sources.
Individual contributions.
Membership dues.
Foundation grants.
Corporate donations.
Government grants.
Fundraising events.
Program-service revenue.
Investment income.
Bequests.
Other sources.
None is automatically good or bad.
But the funding mix can tell you something about the organization.
An organization heavily dependent on one grant may face significant risk if that funding disappears.
An organization dependent on a small number of major donors may have different vulnerabilities from one funded by thousands of small donors.
An organization heavily dependent on government grants may have restrictions on how those funds can be used.
A membership organization may operate differently from one primarily supported by corporate sponsorships.
The important question isn't simply:
“Who gave them money?”
It is:
“How does the organization's funding structure affect what it can do?”
Donors and Sponsors Do Not Automatically Control Organizations
This deserves some nuance.
Seeing a corporation listed as a sponsor does not prove the corporation controls the organization's advocacy.
Seeing a government grant does not prove the organization is a government puppet.
Seeing a foundation grant does not mean the foundation dictates every policy position.
Funding relationships are not automatically sinister.
Organizations routinely accept funding while maintaining independent policies.
But advocates and donors are still allowed to understand those relationships.
If an organization takes significant funding from an industry affected by its advocacy, asking about conflict-of-interest policies is reasonable.
If a particular source represents a substantial portion of revenue, understanding the relationship is reasonable.
Transparency does not require assuming corruption.
It allows people to evaluate potential influence intelligently.
Executive Compensation: Everybody's Favorite Screenshot
Here we go.
Someone discovers that the CEO of a nonprofit earns a six-figure salary.
Facebook immediately convenes the International Tribunal of Comment Sections.
“HOW CAN A CHARITY PAY SOMEONE THAT MUCH?”
Maybe the salary is excessive.
Maybe it isn't.
A compensation number without context is nearly useless.
Ask:
How large is the organization?
How much revenue does it manage?
How many employees?
How many locations?
How complicated are its programs?
What expertise does the position require?
How does compensation compare with similar organizations?
Does the executive manage a national organization with hundreds of employees and tens of millions of dollars?
Or a tiny organization with limited operations?
Those are different jobs.
If you want competent executives managing large, complicated organizations, you generally have to pay professional salaries.
The military community should not demand billion-dollar-level competence for bake-sale wages.
At the same time, compensation deserves scrutiny.
Particularly when executive pay rises dramatically while programs shrink, finances deteriorate, staff turnover increases, or services decline.
Again:
Context and patterns.
Not screenshots and pitchforks.
Administrative Costs Are Not Automatically Waste
Another nonprofit myth:
“Almost all donations should go directly to programs.”
Sounds great.
Until you think about what programs require.
Someone has to process donations.
Someone has to manage grants.
Someone has to maintain databases.
Someone has to protect personal information.
Someone has to pay bills.
Someone has to recruit staff.
Someone has to train volunteers.
Someone has to maintain the website.
Someone has to purchase insurance.
Someone has to conduct audits.
Someone has to make sure the organization complies with federal and state requirements.
Infrastructure costs money.
An organization with inadequate administrative infrastructure can create far more serious problems than one with a reasonable administrative budget.
The goal should not be:
Zero overhead.
The goal should be:
Appropriate overhead that allows the mission to operate effectively.
Fundraising Costs Money Too
Raising money costs money.
Direct mail costs money.
Events cost money.
Advertising costs money.
Fundraising staff cost money.
Payment processing costs money.
Donor databases cost money.
Grant writers cost money.
Yes, sometimes fundraising expenses become excessive.
And yes, donors should look at them.
But spending money to raise money isn't automatically wasteful.
If an organization spends $100,000 on a fundraising campaign and generates $1 million in sustainable support for effective programs, that may be an excellent investment.
If it spends $900,000 to raise $1 million?
You might have a few more questions.
As you should.
Program Spending Matters, But So Do Program Results
Many people look for one number:
What percentage goes to programs?
Useful question.
Not sufficient.
Imagine Organization A spends 90 percent of its budget on programs that accomplish almost nothing.
Organization B spends 75 percent on programs but invests heavily in strong staff, technology, evaluation, financial controls, and infrastructure that allow those programs to produce exceptional results.
Which organization is better?
The percentage alone can't tell you.
This is why financial analysis should eventually connect to outcomes.
What did the organization actually accomplish with the money?
Not:
“We spent $4 million on veteran employment programs.”
Okay.
How many veterans found jobs?
How many kept those jobs?
Did wages improve?
Did the program serve people who couldn't receive the same service elsewhere?
Did the results justify the cost?
Spending is an input.
Impact is the point.
Reserves Are Not Automatically Hoarding
Another number that sometimes creates suspicion is accumulated assets or cash reserves.
“Why are they sitting on all that money instead of helping veterans?”
Maybe that's a fair question.
But reserves can also be responsible financial management.
Organizations need protection against:
Economic downturns.
Loss of major grants.
Unexpected emergencies.
Changes in donor behavior.
Government shutdowns or delayed reimbursements.
Major repairs.
Legal expenses.
Program disruptions.
Pandemics.
And whatever completely unprecedented thing happens next Tuesday.
A nonprofit operating with absolutely no reserves may be one bad quarter away from shutting down.
That doesn't serve anyone.
On the other hand, an organization accumulating increasingly large reserves while continually telling donors that immediate contributions are desperately needed deserves closer examination.
Same principle:
Ask questions before drawing conclusions.
Look at Grants and Assistance
If an organization provides grants or direct assistance, look for information about how much is distributed and to whom.
If it raises money specifically around emergency assistance, how much assistance is actually provided?
If it awards grants to other organizations, who receives them?
If it operates scholarship programs, how much is distributed?
Again, numbers require context.
A program may have substantial administrative costs because eligibility verification is complicated.
Another may distribute assistance efficiently because the process is simple.
The goal isn't finding the lowest possible administrative expense.
The goal is understanding whether resources are reaching the mission effectively.
Look at Contractors and Related Organizations
Sometimes organizations pay significant amounts to outside contractors.
That isn't automatically suspicious.
Specialized services are often cheaper to contract than to maintain internally.
Technology.
Legal services.
Accounting.
Marketing.
Fundraising.
Research.
Event management.
Consulting.
All perfectly normal.
But large contractor payments can be worth understanding.
What service was provided?
Is the amount reasonable?
Are there relationships between leadership and the contractor?
Does the organization have conflict-of-interest policies?
Again, don't assume wrongdoing.
Just follow the money far enough to understand what you're looking at.
Read the Narrative Parts Too
This may be the most important advice in this entire blog.
Do not only look at the numbers.
Form 990 filings can contain descriptions of programs, governance information, policy disclosures, explanations, and other details that provide context.
Annual reports may describe outcomes.
Audited financial statements may contain notes explaining unusual transactions.
An organization's website may explain major initiatives.
Read.
A number that looks outrageous in isolation may have a completely reasonable explanation three pages later.
Or it may look even stranger after you read the explanation.
Either way, you learned something.
Charity Ratings Are Tools, Not Commandments
There are organizations and websites that evaluate nonprofits.
Those resources can be helpful.
They can make financial information easier to understand and identify governance or transparency concerns.
But don't outsource your judgment entirely to a star rating.
A rating system measures what its methodology is designed to measure.
It may heavily weight financial ratios.
Or governance.
Or transparency.
Or reported impact.
Or Diversity of employees, volunteers or beneficiaries.
Or Specific Cultural, Religious, Social impact or Political demographics of employees, volunteers or beneficiaries.
Those are useful indicators.
They are not divine revelation.
A highly rated organization may still operate a program you believe is ineffective.
A lower-rated organization may be experiencing temporary circumstances that deserve context.
Use ratings as another piece of information.
Not the final verdict.
Red Flags Are Questions, Not Convictions
There are financial patterns that reasonably deserve more attention.
Large unexplained changes in spending.
Rapidly increasing executive compensation during organizational decline.
Persistent deficits.
Heavy dependence on one funding source.
Large payments to related parties.
Fundraising expenses that appear disproportionate to revenue generated.
Major discrepancies between fundraising claims and reported program activity.
Repeated governance concerns.
But a red flag means:
Look closer.
It does not mean:
Congratulations, Detective Facebook, you have solved nonprofit corruption.
Ask questions.
Read supporting documents.
Compare years.
Look for explanations.
Give organizations an opportunity to provide context.
Then evaluate the answer.
Transparency Builds Trust
Good organizations shouldn't fear reasonable financial questions.
They may not be able to answer every question instantly.
Some information may be confidential.
Some financial structures are complicated.
And staff should not be expected to provide a personalized accounting seminar to every person who sends an angry Facebook message at 2:14 a.m.
But organizations can make transparency easier.
Publish annual reports.
Make financial statements accessible.
Explain major revenue sources.
Describe how programs are funded.
Provide meaningful outcome data.
Explain unusual changes.
Have clear conflict-of-interest policies.
Transparency doesn't guarantee perfection.
It does make trust easier.
Donors Have Responsibilities Too
Accountability isn't solely the nonprofit's job.
Donors should make informed decisions.
Don't donate because a sad photograph made you emotional and then complain later that you knew nothing about the organization.
Look it up.
Read about its programs.
Review financial information.
Understand what your donation supports.
And perhaps most importantly:
Don't expect every dollar to go directly into someone's hand.
If you want competent organizations with secure technology, trained staff, good financial controls, responsible leadership, legal compliance, measurable programs, and enough infrastructure to survive beyond next Thursday, some money has to pay for those things.
Cheap does not automatically mean efficient.
Expensive does not automatically mean wasteful.
Results matter.
Good, Bad, and Ugly
The good: Financially healthy nonprofits can employ qualified people, build effective programs, invest in infrastructure, survive downturns, maintain strong controls, and serve military-connected communities for decades.
The bad: Organizations can become inefficient, overly dependent on particular funding sources, spend money on programs with weak results, or fail to provide enough transparency for donors to understand what their money accomplishes.
The ugly: Money can become the mission. Organizations can chase funding instead of need, protect revenue streams over community interests, hide conflicts, or use emotional stories to raise money without demonstrating meaningful results.
The existence of money isn't the problem.
What the money does is the question.
Follow the Money, But Bring Your Brain
Financial transparency matters.
Executive compensation matters.
Administrative spending matters.
Fundraising costs matter.
Reserves matter.
Funding sources matter.
Program spending matters.
But none of those numbers should be evaluated alone.
Look at context.
Look at several years.
Look at organizational size.
Look at complexity.
Look at the mission.
Look at outcomes.
And ask reasonable questions.
The goal isn't to catch every nonprofit doing something wrong.
The goal is to understand what organizations are doing right, recognize where they could improve, and identify genuinely troubling patterns when they exist.
Because the military community needs financially strong nonprofits.
It needs organizations capable of paying qualified people.
It needs organizations with enough reserves to survive hard years.
It needs professional infrastructure.
It needs responsible fundraising.
It needs donors willing to support all of that.
But it also needs transparency.
Follow the money.
Then follow the money a little further.
And before declaring someone either a saint or a crook based on one number...
Read the damn Form 990.
Apparently we're reading everything around here now.
