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As a nonprofit professional, you know how important it is to build trust with your community. Supporters will only engage with your organization if they’re confident that their time, energy, and resources are furthering a worthwhile cause. This is especially relevant if you’re trying to engage younger generations in your work, as they tend to value authenticity and transparency even more than their predecessors.
One area where your nonprofit needs to focus on transparency is in the way you manage your finances. In this guide, we’ll share four strategies for increasing financial transparency at your organization, including how to:
Publish Key Financial Reports
Establish Financial Policies
Protect Supporters’ Financial Data
Honor Donors’ Restrictions on Their Gifts
While these tips are a good starting point, you might consider working with a nonprofit accountant, bookkeeper, or financial consultant to help navigate your organization’s unique situation regarding transparency and accountability. Let’s get started!
1. Publish Key Financial Reports
While proper financial reporting is most often associated with compliance, it’s also helpful for showing donors and community members how your nonprofit is handling its finances. Many supporters will be satisfied after reviewing a few graphs of financial statistics in your annual report or on your organization’s website, so make sure those charts are easy to locate and interpret.
However, some current and potential donors (especially mid-level and major contributors) will want to see more detailed information about your organization’s financial situation. To lock in their support, ensure these key financial reports are easily accessible to donors:
Recent tax returns. After your nonprofit files its annual Form 990, you’re required to make it publicly available for at least three years. The IRS will publish the form on their website, but you should link to it on your website so interested supporters can find it quickly. That way, you’ll also know exactly where it is if a donor asks for it.
Treasurer report. This document is compiled either monthly or annually by the main financial expert on your organization’s board of directors. It distills all of your transactions and bank statements from a designated time period into one cohesive report, providing an overview of your current financial situation that you can show prospective donors.
Financial statements. These reports organize and summarize your organization’s financial data in different ways so you can analyze and apply it effectively. According to Jitasa, the four main reports to know are the statements of activities, financial position, cash flows, and functional expenses.
Your annual report is the best way to publicize your nonprofit’s financial statements. Use the data they contain to create the graphs in the financial overview section of the report, then include the full statements as appendices.
2. Establish Financial Policies
The quality and accuracy of your nonprofit’s financial reports depend on whether your team manages your resources properly day-to-day. Financial policies provide guidelines for doing just that.
The most important financial regulations to implement at your organization include the following:
Gift acceptance policy. This guideline details the types of donations your nonprofit can and can’t accept and the circumstances under which you’ll accept each gift. That way, if you have to reject a supporter’s contribution, you’ll be able to present an official reason and avoid coming off as ungrateful.
Conflict of interest policy. This policy defines the terms of a conflict of interest at your organization and outlines the steps to disclose and resolve any conflicts that may arise. It helps prevent your leaders and board members from making decisions influenced by personal or business interests that may be in opposition to their duty to your nonprofit.
Expense reimbursement policy. If staff members or volunteers spend their personal money on behalf of your organization, this policy helps determine whether and how they can be reimbursed.
Staff compensation policy. This guideline ensures your staff members are compensated fairly (but not excessively) for their work at your organization. When creating this policy, Astron Solutions recommends taking a total rewards approach. This means you should consider your staff members’ direct compensation (such as salaries) and their indirect compensation (such as health insurance and paid time off).
Although your financial policies are mostly for internal purposes at your organization, make sure to communicate about them with your supporters when relevant opportunities arise. For instance, if your nonprofit has recently started accepting stock donations, you might tell supporters about your gift acceptance policy so they know how to take advantage of this new giving method.
3. Protect Supporters’ Financial Data
When supporters participate in your fundraising campaigns, they share a lot of personal data with your nonprofit. In particular, they entrust you with their credit card, bank account, or mobile payment information when they donate online or pay fundraising event registration fees. If a breach occurs and your donors’ financial data is exposed, it’ll likely break their trust in your organization.
To reduce this major risk, your nonprofit needs to take stringent data security precautions such as:
Encrypting any platforms that store financial information.
Limiting user permissions for your database to those who need access to do their jobs well.
Setting up two-factor authentication and ensuring passwords are secure for every user account.
Training your employees in data security best practices.
With these policies in place, communicate to your supporters that you’re taking the necessary precautions to keep their information safe. For instance, you could put a disclaimer at the bottom of your donation page that your payment processor is PCI compliant and allow donors to opt out of having their data collected and stored if they prefer. This way, they’ll be more confident in your nonprofit’s ability to protect their sensitive data and, therefore, more likely to contribute.
4. Honor Donors’ Restrictions on Their Gifts
Major and planned gifts are an essential part of your fundraising strategy. In fact, it’s estimated that 80% of nonprofit contributions come from the top 20% of donors. However, the donors who give these significant amounts often want some level of control over how their money is used.
Many major and planned gifts come with restrictions, meaning that the donor earmarks them for a specific purpose at your organization based on their interests and values. Let’s say a major donor who is passionate about education contributes to an environmental nonprofit. They might restrict that gift to be used only to launch the organization’s new program that teaches local elementary school students about recycling.
To remain accountable to these critical supporters, your nonprofit needs to honor these restrictions. Not only will you avoid legal action from the IRS or the donor (who has the right to sue for misallocation of funds), but you’ll also show supporters that you care about their interests, helping to deepen your relationship with them.
Financial transparency is not only critical for showing donors that you’re effectively using the funds they’ve contributed, but also for operating your organization smoothly and complying with government regulations. A mindset of accountability starts from within an organization, so ensure your team is on the same page about working toward transparency with your community.