Giving 101: Two ways to evaluate nonprofit financials

If the words audit, budget and variance have your head spinning, don't worry. Most of us who work in philanthropy aren't accountants, and we continue learning the ins and outs of nonprofit financials throughout our careers, so you're not alone when it comes to struggling to know if an organization is fiscally sound.

While you certainly don't need to sign up for Accounting 101 at your local university extension any time soon, if you plan to be a lifelong philanthropist, a basic understanding of nonprofit financials will certainly help ensure that your personal gifts are used responsibly. Here are two simple ways to review a nonprofits financials:

1. Read the Annual Report. Most organizations prepare an annual report each year and make them available online. There is usually a page with pie charts and simple budgets that will give you a basic overview of the organization's finances from the previous year. This will help you understand where their funding goes in terms of both program areas and administration.

2. 80/20. A good rule of thumb is remembering the 80/20 rule. A financially healthy organization will support program areas with at least 80% of its budget. If it's closer to 90%, even better, but somewhere around 80% also means that the remaining 20% (or less) goes toward the essential but less glamorous overhead costs (like salaries and operating expenses), and the majority of its funding directly serves its beneficiaries.

What are some of the ways you assess an organizations financial health before making a donation?