Why Your Form 990 Matters to Funders

Speaker 1 0:11
Well, good afternoon, everyone. My name is Amanda Tadrinsky, and I’m a senior DonorPerfect training specialist. And I want to welcome you guys all to Nicole Frazina’s session, Wire Form 990. matters to funders. Nicole Frisina has over 20 years of experience in Read More

Speaker 1 0:11
Well, good afternoon, everyone. My name is Amanda Tadrinsky, and I’m a senior DonorPerfect training specialist. And I want to welcome you guys all to Nicole Frazina’s session, Wire Form 990. matters to funders. Nicole Frisina has over 20 years of experience in financial management, consulting, and internal control solutions for nonprofit organizations. She’s deeply committed to supporting mission-driven organizations and has helped nonprofits improve financial transparency, strengthen internal controls, and prepare for audits. Her work enables leadership teams to build trust with funders and stakeholders and make confident, informed decisions. Nicole is an active member of the New York City Imagine Awards, and she recently joined the board of Nonprofit Resource Hub. She was featured on the Nonprofit Show with Julia Patrick and has spoken at nonprofit events across the New York City area. Just a few housekeeping items. Please submit your questions in a Q and A tab, so we can address them during the session. And all sessions are being recorded and will be available on the DonorPerfect website after the conference. With that said, Nicole, go ahead and take it away.

Speaker 2 1:16
Thank you, Amanda. Hi everybody. Great, happy to be here today. As Amanda mentioned, we’re going to talk about why your form 990 matters to funders, but before we sort of dive into the session, I wanted to briefly introduce your part-time controller, or YPTC for short. We’re a professional services firm that specializes exclusively in nonprofit financial management with over 30 years of experience working with nonprofits. Our services include accounting, reporting, data visualization, and financial best practices. While we don’t perform audits or prepare Form 990s we work closely with our clients to help them get ready for both. Today, our team of more than 800 professionals support about 2300 nonprofit organizations nationwide, and we tailor our approach, whether it’s on site or remote, to each client’s needs, and so a little bit talking about how we’re going to, what we’re going to discuss today, your form 990 it’s more than a compliance checkbox. It is often a funder’s first window into your organization. In today’s session, we’re going to look at how funders are using the 990 which sections they review most closely, and ways to present the information in a way that builds trust and addresses questions proactively, and so very often your form 990 is a funder’s first glance into your organization, sometimes even before the conversation even ever happens. So, the form 990 provides a public snapshot of your finances, governance, and mission activities funders use it as a transparency tool and often compare it closely to the audited financial statements. Filing on time demonstrates reliability and compliance. Late filings or repeated extensions often prompt follow-up questions from funders, and funders want to see alignment with the audit, a clear description of mission and program spending, and governance and compensation practices that appear reasonable. And one final point to mention here: failing to file a required Form 990 for three consecutive years will automatically result in the loss of a tax exempt status. This is not a discretionary role rule, it is an automatic rule, and it’s a compliance risk that funders are watching for. So, let’s shift from the big picture to the details funders will focus on most when reviewing the 990 Each section in the core form 990 listed here gives funders insight into governance, financial health alignment with mission. Funders will use this to calculate and compare ratios like program versus administrative expenses and to check for consistency with what they see in the audited financial statements. Here’s a high-level overview of the sections we’re going to focus on today. In the summary, funders will look for consistency between your mission statement and your proposal, so that grant proposal that you’re sending to the to the funder, they want to confirm that your activities on the form 990 align with what your stated purpose is in the grant. The program service accomplishments section is where the org should clearly communicate the impact of its major programs. Funders are looking here for measurable. Outcomes, and they’ll pay attention to any significant changes in services in the governance section. Funders are taking note of governance best of governance practices in place, and often will pay close attention to whether the board is reviewing that form 990 before it is filed for the compensation of officers, directors, and key personnel. Here, funders are assessing whether the compensation appears reasonable in the revenues and expense section. Funders are evaluating how diversified revenue streams are, and whether expense allocations appear reasonable and consistent with the organization’s mission. And then, under the public support test for public charities, funders want to see that the organization meets the IRS public support test and maintains a broad base of funding, not relying too heavily on one source, so even without seeing individual donor names, a funder can often tell when revenue is concentrated by looking at public support trends, and then in the supplemental information or Schedule O, this section will provide important context explaining governance details and any unusual or complex financial items. Next, we’re going to walk through each of these sections using screenshots, so you can see exactly what the funders see and how they’re interpreting it. So, we’re going to start with here with part one of the form 990 This is the summary snapshot, and it’s often the very first thing, the funder will review it gives them a quick high-level picture of your organization’s mission, financial health, and compliance.

Speaker 2 6:48
So, a few things that they will focus on is first, the mission statement. The funders are going to want to see that your mission aligns with your grant narrative and reflects your current priorities. If it’s outdated, this could be a red flag, even if the rest of the form 990 is strong. So, when going through this with my clients, when I talk to them to help that help them get ready for the 990 I ensure that they’re reading this mission statement every year to just ensure that it’s aligning with what current priorities are, you’re also going to look for clarity. They, you want to keep that mission description short and clear. Funders shouldn’t have to flip pages to understand what your organization is doing. Here’s an example of a mission statement. It’s simply saying our mission is to advance economic opportunity for underserved young adults through workforce development, career coaching, and employer partnerships. It’s very clear, concise, very to the point, but it explains what’s going on with the organization. And then they’re going to look at the numbers, they’re going to do a quick consistency check here. They want to make sure that the figures in the summary are tying back to your audited financial statements. I’ll also note here that they should, that shouldn’t be an issue, but very rarely is maybe the audit one audit firm is doing the 990 while another audit firm prepared the finalized the audit. It doesn’t happen often, but you want to make sure that these do agree and tie out this section. Here is important because it sets the tone for the rest of the form 990 So clarity and consistent consistency really make a difference. Then under part three or page two, this is where funders will go to understand what you actually do as an organization, and whether it’s making a difference. This section helps highlight your organization’s major programs and their impact. Funders here are looking for plain language descriptions of your services, and whenever possible, measurable outcomes. Now, measurable does not have to mean complicated. It might be maybe the number of people served, or services delivered, or outcomes achieved during the year. So we showed that example of the mission statement, but then in the bottom section here, this is an example of what funders would like to see for the program service accomplishments. It’s clearly explaining what the program does, so here it’s saying the program is a youth workforce readiness program. It’s saying how many people it served, they serve 325 participants, and then it’s saying what outcomes were achieved. They delivered 2400 hours of job readiness training and individual career coaching, but it’s also, and it’s also noting a program change. So it says here that 78% of participants completed the program. And 65% secured employment, but then a later on explains that this expanded in the current year because it includes partnerships with five local employers that allowed this increased opportunity, so a funder is going to want to see that you are explaining maybe some differences from the prior year automatically, and because the part three is public and frequently reviewed during the cramp, the grant process, it’s essentially a free storytelling and marketing opportunity for every organization, so you want to keep those narratives concise, clear, and focused on results. This will go a long way with funders. Then moving on to part six, this focuses on governance policies, which funders view as key indicators of strong oversight. While most of these policies are not required by the IRS, funders generally expect yes responses as a best practice signal management and board should review these questions carefully to ensure accuracy and demonstrate accountability, and having these policies in place signals strong governance and financial stewardship. And if you notice here in question 11, a the question is asking whether the organization provided a complete copy of the form 990 to all members of its governing body before filing, we recommend designating one individual or committee member to conduct a detailed review. Some examples are maybe your treasurer or a finance committee member or another board member who has relevant experience or an expertise to serve as the detailed reviewer. The takeaway here is that funders don’t just want policies on paper, they do want to see evidence that the board is engaged and informed.

Speaker 2 11:55
Then, here in part seven, this is where compensation for officers, directors, and key employees are covered. This is an area that funders will review closely. Funders are going to look at this section to understand who leads the organization and whether those individuals are paid or serve as volunteers, salaries and reported hours should be reasonable for your organization’s size and reported on a calendar year basis, so that they tie directly to those W-2s and the 1090 nines, and then form requires actual numbers, so responses like varies or na they may raise questions with funders, and because most board members are volunteers, reported hours should be realistic. So, for example, as a board volunteer, as a board member, and I’m volunteering, I would not expect to see 40 hours per week, as you know, under that column B, there I would see maybe two hours a week or four hours a week, depending on the size of the organization, but you want it to be realistic. Then under Part A of the Form 990 this is asking for detailed information about your revenue streams. This section provides a breakdown of revenue sources, including contributions and grants, program service revenue, and other revenue streams, such as investment income or fundraising events. Funders will look at this section to assess whether revenue streams are diversified and relatively distant over time. So be prepared to explain significant shifts year over year or unusual other revenue, such as unrelated business income. In short, funders use this section to understand how stable and sustainable your funding model really is. And then in part nine of the form 990 this details expenses by category, so program management in general and fundraising. Now, if this looks familiar, which it should, because it relates to that statement of functional expense that’s also in your audited financial statements, so for both the audit and the form 990 accurate reporting of functional expenses starts with proper expense tracking in your accounting system, so for QuickBooks users, sometimes you can do this through the class feature and allows you to sort of organize that by the different programs and general amount management, in general, you can also check out one of our other webinars that we’ve done. It’s called Nonprofit Financial Reporting: Building a Simple System for Complicated Needs. It’s available free on our website. This discusses this in more details. And then funders generally expect more. Resources to support program activities, often referred to as a program ratio. This ratio is important, but it’s not going to tell the full story. So, you need to be ready to explain yours. So, for example, a new organization, they may have higher administrative costs early on, completely makes sense, or infrastructure investments, such as technology or staff training, that might temporarily raise your support costs, but it’s going to add long-term value. And for public charities that are soliciting donations, you’re going to see fundraising expenses, and they should be reported. If you are a public charity and you have missing or zero fundraising costs that will raise red flags for funders, and I want to mention here that funders, they’re not looking for perfect numbers, not at all, but they’re just looking for transparency and explanations that make sense. And then under Schedule A of the Form 990 this provides information about your public charity status and how your public support is calculated. Key examples of public support include direct donations, grants, membership fees, and gross receipts from volunteer-run fundraising activities. Now, while completing Schedule A is best left to your tax accountant management, and the board should monitor compliance throughout the year to avoid surprises. So, you want to pay attention to large contributions from individuals and corporations, especially those that could exceed that 2% tipping threshold. Also, you want to watch for excessive support from disqualified persons, such as a board member, since those amounts are generally excluded from the public support numerator, numerator, and now for 509 a two organizations, which often have higher levels of earned income, it’s important to monitor reliance on investment income and unrelated business income. This must generally remain below or at 33 and a third percent. This monitoring matters because failing the public support test for two consecutive years can result in loss of public charity status and an automatic reclassification as a public foundation.

Speaker 2 17:22
This is one where waiting until the year end could create problems that you’re not able to easily fix. And I want to just clarify here that often you’ll hear nonprofits referred to as a 501 c3 501 c3 is the federal tax exempt exemption for organizations. It’s sort of like the umbrella, but when you break it down, there’s the 509 A’s. So, a 509 A one is typically a public charity that’s primarily supported by donations and grants only, whereas a 509 A two is also a public charity, but those are supported by a mix of donations and mission-related earned revenue. We have some examples here on the slide itself to help explain that more. Now, moving on to Schedule O. This is used to provide additional explanations or required details to support responses elsewhere in the form 990 This is where organizations get to add narrative context to help readers understand what’s behind the numbers and the yes or no answers throughout the form 990 So, a common example is explaining the governance practices, such as how the board is reviewing the form 990 before it’s filed. For instance, an organization might note that the treasurer or finance committee member is conducting a detailed review, and that the full board is given the opportunity to review and ask questions prior to filing. The schedule O is also used to also use to provide details about conflict of interest, whistleblower, and document retention policies. It’ll explain how officer and key employee compensation is determined, and it’ll describe significant changes in revenue or expenses. It’s also the place to note unusual grants that are maybe excluded from public support calculations, and it helps provide required lobbying or fundraising disclosures, and explain any differences between the audited financial statements and the form 990 A good tip is that you want to always reference the specific part and line number of the form 990 So, in the example shown here, it says that this is under part six, line 11 A, so it’s very easy to know what question is being referenced, and the reader can easily go back and say, oh, they answered yes here, but this helps explain how they’re doing the process, and the schedule O, it’s another place where you get to proactively explain your story instead of letting the funders guess. And then one final, but important thing I want to mention is under part 11, the reconciliation of net assets. This will reconcile the audited financial statements to the form 990 This section explains differences between tax reporting on the form 990 and accounting requirements reflected in the audit. These differences often occur because certain items are treated differently for tax reporting rather than for financial reporting purposes. Throughout the year, it’s important to monitor items that commonly will drive these differences. A great example is donated services. You will have them reported on your audited financial statements, but they’re not going to be reported in your taxes under 990 Another example is investment gains or losses, maybe prior period adjustments are not as common, but they do happen, or maybe some unusual grants. This reconciliation ultimately will explain why your audited financial statements and your form 990 may not match, and it helps funders understand that those differences are expected, and then we want to just end this section with a quick reflection scenario. It’s probably something that funders will see all the time. So, imagine you are a nonprofit, your latest set of financials will show that you have low unrestricted cash, but a large balance of donor-restricted net assets. There’s an operating deficit and a relatively high percentage of fundraising expenses. So, take a moment and think, what might explain these results? How would you communicate them to funders in a way that’s clear and not defensive? You’re not trying to justify or spin it in any way, you’re simply trying to provide a context. So, let’s think about that. How would we answer that? So, usually there’s often a reasonable explanation. Maybe it’s a capital campaign that’s in progress, maybe it’s timing delays in government funding, which is very common at this moment, or maybe it’s strategic investments that are raising costs in the short term, but support a long-term sustainability. This is where tools like the Schedule O on your Form 990 will help with these narratives. It also, you can add it in your audit footnotes.

Speaker 2 22:18
It can also be maybe a management discussion, and it’ll help make this really helpful, moving this forward. It allows you to explain what’s going on, instead of leaving funders to guess. So, we have some examples here of how your explanation might be framed, but one I want to focus on here is scenario two. We incurred higher fundraising costs this year, as we work to diversify revenue following a federal funding delay, those efforts have already resulted in new grant commitments for the coming year. It’s very simple, it’s factual, it’s forward-looking, and helps tie to the strategy. So, that ends our session for today. I want to say, thank you so much for taking the time to speak with me. And if there’s any one takeaway that I could leave you with is that the Form 990 it’s more than a filing requirement, it really is a public facing document that funders are using and helps assess transparency, consistency, and stewardship. Thank you for your time, Amanda. Do we have any questions? I did not get a chance.

Speaker 1 23:26
Let’s see here. I don’t see a question in the Q&A. Let me see. Someone was asking if you could share a link to your website. You mentioned that you had another training, so Cindy Smith was very interested in being able to access that.

Speaker 2 23:45
Absolutely, so I can put it in the chat, but our website is www dot y p t c, so y as in your part time controller.com Very simple, but I would absolutely put it in the chat as well, for everybody, too.

Speaker 1 24:03
Awesome. So, while you’re putting that in the chat, I’m just going to go ahead and do our little wrap up here. So, for our next sessions that we have coming up, let me just go ahead and find that. So, next up we have Mallory Erickson’s session segmentation that feels good, moving beyond dollars to donor alignment on stage one, or you guys can go to stage two, hear about illuminate your impact, how fundraising and finance alignment builds donors trust, and that’s with Natalie Anderson from Sage. So we hope to see you guys there, and you all have a great day. Bye.