GuideStar is a 501(c)(3) public charity that collects, organizes, and presents information about nonprofits in an easy-to-understand format. Its website has many uses and contains the world’s largest database of information about nonprofits. The audiences that access information on GuideStar crosses many sectors. This audience includes donors, funders, researchers, educators, professional service providers, governing agencies and the media. Many times, this is their go-to place for information on a nonprofit organization.
Most people use GuideStar to access 990 Forms for nonprofit organizations. These forms are an IRS tax document that federally tax-exempt organizations file each year. In this article, we will break down the importance of understanding the information on GuideStar from an organizational viewpoint and from an individual viewpoint.
As a nonprofit organization
As an organization, why is it important to review your profile on GuideStar? A nonprofit’s 990 can provide valuable information for donors and grantors, such as foundations, governments, and corporations. Specifically, funders view this information to analyze if the nonprofit they provide financial support to is a good use of funds and seemingly low-risk. Since 990s are public documents and widely available, nonprofits should be diligent about filling them out correctly and on-time.
Financial ratios, such as the ones below, are widely used tools for funders to understand the financial health of an organization. The ratios are easy to calculate and can shed light on the financial health of an organization. It is important to note, financial ratios are a part of evaluating an organization and should not be used as a standalone measure.
Analyzing a nonprofit’s program ratio
Calculation: The total program service expenses divided by the total expenditures.
A nonprofit’s program ratio indicates the amount per dollar an organization spends directly on programs. It is important to compare the median program ratio against other nonprofits of the same peer groups. It is also important to note the age of the organization. Younger programs are building infrastructure and efficiencies to support their mission. Nonprofits generally spend 70% of operating budgets on direct program costs. Organizations should aim to increase higher program ratios and devote as many resources towards the mission as possible.
Analyzing a nonprofit’s debt ratio
Calculation: Total liabilities divided by total assets
The debt ratio indicates an organization’s financial solvency by measuring the relationship of its total liabilities and debt to its total assets. Higher ratios could indicate cash flow problems in the future. Each industry has its own benchmarks for debt, but .5 is a reasonable ratio which means the organization has twice as many assets as liabilities. Nonprofits generally operate in a ratio of one, meaning the organization has an even mix of debt and assets. Anything above one indicates a company may not have enough cash to satisfy debt obligations.
Analyzing a nonprofit’s liquidity ratio
Calculation: ([Fund balances – permanently restricted – land, buildings, and equipment] x 12) divided by total expenses
The liquid funds indicator measures a nonprofit organization’s operating liquidity by dividing fund balances (other than the land, building, and equipment fund) by an average month’s expenses. These are the financial resources a nonprofit may legally and reasonably drawdown. Liquidity ratios greater than one indicate the company is in good financial health. A high liquid funds indicator could point to low cash-funding urgency and excessive savings. A low liquid funds indicator could point to high cash need and low savings.
Analyzing a nonprofit’s financial vs. mission health
It is imperative to also understand that a ratio may indicate a healthier financial position, but it does not necessarily indicate a mission-healthy organization. All too often, nonprofits cringe at the thought of increasing overhead to meet the needs of the organization. Often times, employees cover two or three jobs, work on low performing or non-functioning technology, or go without raises. In the nonprofit world, we also see dedicated team members pay higher benefits costs or are given no benefits. Furthermore, go without training or professional development, and work in low-rent office buildings with old office furniture in unsafe environments.
These common factors point to a growing concern among funders that nonprofits are starving their mission to avoid adding overhead. Not increasing overhead when necessary (especially in the beginning stages of growth) is often a short-term solution. Not to mention, the long-term impacts can be high staff turnover, compassion fatigue and program errors which lead to compliance issues. You may also see financial risks and overall loss of interest in the organization.
Uses of GuideStar as an individual
A lot of good information can also be found and shared for individuals. Below is a list of items provided on GuideStar that individuals may find beneficial.
Find Nonprofit Employment Opportunities
Participating nonprofit organizations can advertise employment opportunities in the classifieds section of the GuideStar website. Plus, GuideStar’s classified ads can be used for other purposes, such as advertising volunteer opportunities and the need for donated goods.
Check Nonprofit Compensation
Salaries of officers, directors, trustees, and key employees who earn more than $50,000 annually can be found on the 990 Form. Additionally, GuideStar offers an annual compensation report, which you can use to compare nonprofit’s compensation practices by the following:
- Job category
- Type of nonprofit
- Budget size
- or state.
This is a great way to prospect other nonprofits for potential employment.
Research for Personal Giving Decisions
The GuideStar database is a valuable resource for financial information on nonprofits, including 990s. In addition to the IRS-provided data, more than 67,000 organizations voluntarily complete the GuideStar Information Form (GIF). This provides detailed information about nonprofit organizations, including missions, programs, accomplishments, and objectives.
Verify a Nonprofit’s 501(c)(3) Status
Finally, users often go to the GuideStar database to determine if an organization is a legitimate tax-exempt organization.
With this in mind, it’s easy to see why GuideStar’s mission is “to revolutionize philanthropy and advance transparency, enable users to make better decisions and encourage charitable giving.”