Why Transparency Matters

Back in the 1950s, if your parents or grandparents wanted to help a nonprofit, they did something that now sounds completely baffling - they mailed a check. 

Your grandmother would sit down in that cubby desk where the only house phone resided, coupled with important documents in the drawer. She’d pull out her checkbook, endorse the check, and then put on her best dress to head off to the post office to mail in her contribution.

The notion of transparency and trust in the 50s (and up to the 90s, one could argue) was more or less assumed. Large nonprofits had marketing budgets and would appear on the radio or television. Their causes were noble, as are most nonprofit causes. But because they were on TV or the radio, the assumption was they must be doing good work. Or better said - honest work.

Odds are most nonprofits were engaged in honest work. But statistically speaking, there are always nefarious actors in large groupings of anything. Fast-forward to the present, and said nefarious actors are easier to detect. The internet has provided every human being a tool to investigate and unearth wrong-doings or “non-mission-aligned” activities and call attention to them. This is extremely useful for donors who want to ensure their donation is being put to good use. One would assume that because donors have now been empowered with this investigative tool, nonprofits would, in turn, make it as easy as possible for donors to find the information they’re seeking and make transparency a strategic focus. The good ones do. But it’s alarming how many do not. And this affects a core issue that drives every donation, no matter the amount - trust.

Levels of Trust

Trust in nonprofits varies by country. According to the 2020 Edelman Trust Barometer, trust in nonprofits in India, Mexico, and Argentina was 80%, 73%, and 69%, respectively. Where did the US fall? The country that leads both charitable giving and disbursement lagged behind the previous three as well as Malaysia, Hong Kong, South Korea, South Africa, Brazil, France, Spain, and a handful of others. Sadly enough, trust in nonprofits in the US is barely 50%. And worse, this is down from 52% the year prior.

Edelman conducted extensive fieldwork for their report, amassing 34,000 plus respondents from over 28 countries. While some in the US nonprofit sector are not shocked by the findings (considering only 52% of respondents trusted nonprofits in 2019), the results suggest much work is needed. For example, only 43% of respondents felt nonprofits do a good/very good job addressing community-level problems. In terms of exposing corruption, just 35% responded nonprofits do a good/very good job, and the same low percentage felt nonprofits were transparent with their funding. Flip this last finding around, and just under 7 out of every 10 people surveyed felt nonprofits are not doing a good job of being transparent. We’re living in arguably the most transparent time in the history of humanity. So, where’s the disconnect?

It’s a confounding question. But this does not mean that the answer is equally complicated. If trust is low, then donor gifts will suffer. And because nonprofits depend on donor revenue to carry out their programming and work towards fulfilling their mission, increased transparency is vital. In the same Edelman survey, some bright spots emerged. For example, potential donors and supporters list strong values and ethics as one of the key areas they look for when considering supporting a nonprofit. The survey asked respondents if they felt institutions in government, the media, private business, and nonprofits were purpose-driven, honest, and fair, and nonprofits were the only sector of the four that finished above a 50% competency rating.

When asked whether the same four institutions had a vision for the future, nonprofits again finished higher than the others - 10 points higher than the government. This is promising for the sector at large, signaling that the public trusts that nonprofits will improve their performance. But it starts and ends with transparency.

People Matter

Returning to the internet for a moment. Nowadays, before a potential donor gives or considers supporting a nonprofit with their time or talent, there are a plethora of “advise articles/blogs” they can tap into, guiding them through a virtual checklist of what to look for with any given nonprofit. One of the first items is the Board. All 501c3 nonprofits are required to have a Board with a minimum of three members. The IRS does not dictate board term length nor the frequency of meetings. But best practice is meetings four times per year and, at a minimum, once per year.

A transparent nonprofit lists its Board members’ names on their website and many go above and beyond (photos, biographies, etc.) The Board is the organization’s backbone, providing strategic direction, and tasked with approving the annual budget. Second, the staff and volunteers carry out the nonprofit’s mission, putting donor funds into action and reporting their work’s impact. Some nonprofits are quite large, so listing all employees and volunteers online is not practical. However senior management, department heads, and key volunteer leaders should either be mentioned or their biographies shared online. An involved donor will more than likely be communicating with senior management (more so than with the Board). Donors want to know who is receiving their gift and the folks responsible for putting it into action.

Nonprofit fundraising and marketing departments frequently espouse the importance of placing the donor as the central figure in their storytelling. Nobody cares how many master’s degrees your staff has or the new headquarters they just moved into. The donor wants to see themselves as a protagonist figure, enacting change and impacting whatever the cause. This is true and a proven model to retain and capture more support. However, the caveat is we are all people, and people are by nature a social species. While donors give to the mission, a working and trusting relationship with the folks behind the scenes is fundamental. The old sales mantra of “people buying from people they like” also holds true in the nonprofit world. A nonprofit’s staff and Board should be as visible as possible and as accessible as possible. Donors want this and certainly appreciate it.

Numerical Transparency Tools

The people behind a nonprofit are the engine that keeps the cause running. But how do donors know their gifts are being responsibly used? And more than just their gift, how do they know their donation is going to a healthy organization? There are a host of financial metrics that successful nonprofits track and communicate. The list is long, but we are going to focus on the top three. These three ratios are transparent, clear, and, most importantly, provide donors “peace of mind.”

Operating Reserve Ratio

Perhaps the most widely used ratio, this figure communicates how long a nonprofit can continue operating (paying salaries and other monthly fixed costs), assuming no future revenue. The calculation deducts fixed assets from unrestricted assets and divides them by annual expenses (minus depreciation and amortization). To convert this into the number of months a nonprofit can survive, simply multiply the final number by 12 (months).

A very healthy nonprofit has a ratio of 100% (12 months). This means they can keep fulfilling their mission for one year without the need for future funding. Most nonprofits, however, fall into the 4-8 month range, which is normal and expected. Anything below 3 months is a sign of trouble, and above 12 months is a sign the nonprofit might be foregoing potential opportunities to further its mission in exchange for hanging onto cash.

Program Expense Ratio

This ratio is under constant scrutiny. If you asked 100 donors whether they want a portion of their donation to support Jim’s salary in Marketing, the rent, or the nonprofit’s weekly gas expense, 100 would likely say no. People like to give to programs and services that generate a direct impact on the recipient. One of the hardest things to explain to a donor is without Jim in Marketing, a physical structure, and gas, the nonprofit’s overall impact would be compromised. With that said, the program expense ratio shows how much of annual revenue is being spent on programming. The calculation takes the total program expenses and divides it by total expenses.

A good program expense ratio is above 75%. And while some nonprofits are applauded for 90% ratios and above, this could come at the “expense” of not investing enough in people and other items to sustain growth over the long term.

Profit Margin Ratio

The profit margin ratio in the nonprofit world typically receives a sideward glance. “Nonprofits don’t exist to make a profit; what are we talking about?” You’ll hear that refrain from time to time. And while this is true, this ratio aims to communicate whether the organization, on the whole, is earning more than it’s spending on operations. If the organization is literally meeting its month-to-month obligations in terms of fixed and variable costs and then starting fresh the following month, that’s a recipe for disaster. Donor funds are never constant; they ebb and flow like few other revenue sources.

The change in net assets is divided by total revenue and support to arrive at the profit margin ratio. If this ratio is 50% or above, the nonprofit could be signaling that new donors aren’t necessary as the organization has enough cash on hand. A ratio that is too low rightly spells trouble. Regardless of the ratio, however, is the explanation. A clear and succinct explanation next to the ratio is always helpful.

Non-Numerical Transparency Tools

While numbers speak volumes, there are other ways nonprofits can be more transparent to donors. For example, if you are an agency that feeds individuals and families, keeping a running tally online of the number of individuals and families served monthly, what was served, where it was served, and then a couple of moving videos and testimonials is great. You are communicating the raw figures but also mixing in the human element, which donors are ultimately after.

All programs and services, regardless of the nonprofit, can be summarized monthly. Many nonprofits send out newsletters that do just this, but emails are frequently missed or remain unopened. What happens if a major donor simply misses an email but does go to the nonprofit’s website looking for impact numbers or testimonials and can’t find them? Whatever is sent out in the newsletter should be housed somewhere on the site. And most importantly, it should be easy to find. This could be a PDF version of the newsletter with a short summary of what occurred during that month under the larger “Your Impact” banner. With email and social media, it’s easy to assume that emails, tweets, or stories are reaching everyone. They’re not, so having that information everywhere is vital.

When that Trust is Gone

A nonprofit and its donors are a relationship. Like any other relationship in life, when trust takes a hit, it’s hard to earn it back. 

Transparency is key for all the points we’ve touched on. Putting in place the previously mentioned measures is an excellent start, but donors are human beings, and human beings require communication. One of the biggest stumbling blocks that all nonprofits face, no matter how transparent they are, is failing to follow up. There is no such thing as “thanking someone too much.” Yes, flowers to a donor’s home, place of work, kid’s school, or a mariachi band serenading them for a week is a bit over the top. But when a donation comes in, regardless of the size, a good nonprofit thanks that donor (email, phone call, text, etc.) within 24 hours. If the donation is exceptionally large, the process is even quicker and more personalized.

Transparency is more than just showing what you do with a donor’s gift. It’s also about being communicative and appreciative with all donors, regularly and almost obsessively. Not doing so will ultimately result in a lack of trust, and when that trust is gone, you need to work doubly hard to gain it back.

Transparency is the name of the game in 2022 and will continue to be moving forward. There is more and more money flowing into nonprofit agencies year by year. People want to make an impact, leave a legacy, and are warm-hearted by nature. Making them feel appreciated and needed and giving them the tools to investigate and ensure their money is being appropriately used is of utmost concern. Transparency is not a process; it’s part of a nonprofit’s culture - every nonprofit’s culture.