Importance and Benefits of Financial Transparency for Nonprofits

Financial transparency isn’t just “beneficial” for nonprofits: it’s crucial for their public image, mission, and achievement of their goals. It’s hardly possible to be successful and build long-term relationships without being transparent – not to mention the importance of complying with legal requirement.

Transparency and honesty are key factors in efficient communication with donors, funding sources, and tax authorities. They inspire people’s confidence, trust, and willingness to cooperate. The importance of transparent practices and procedures applies to both legal and ethical aspects.

Legal compliance

The IRS requires that nonprofit organizations publicly disclose specific financial documents and information. The exact list of document subject to the disclosure requirement depends on the organization’s specifics. Usually, this requirement covers the following:

Disclosing these documents and making them publicly available means that an organization should provide them on time for anyone who’d request them. The easiest way to do that is making this data available online, on the website of the organization.

Ethical aspects

Ethical practices of financial transparency are not strictly regulated, but they are as important as legal requirements. Ethics in managing donors’ and sponsors’ funds creates confidence and trust, being the key factor for the organization’s success.

Being clear about how you’re spending each dollar you receive as a donation is essential for long-term cooperation with your donors and attracting new funds. Honesty and reliability that inspires donors’ confidence also means being ready to make available necessary supporting documents timely upon request.

Accountability for funds received and spent on mission goals is essential not only for donors. Tax authorities also require access to the organizations’ documents supporting its tax-exempt status and reports revealing how received donations are spent and what the organization’s employees are working on. That’s why it is reasonable to keep record of work process to be able to run detailed reports on that data.

Making transparency work

Being transparent involves clearly explaining your goals and showing ways that you use to achieve them. This includes administrative procedures, communication activities, accounting works, and much more. Here are some practical steps towards transparency and clarity that you can use to demonstrate your commitment to honest, ethical and efficient practices.

Tell your story

Donors and sponsors need to know why they should trust you as a nonprofit organization. Here’s where clear and detailed communication matters, based on both your vision and your practical approach.

Basically, people and organizations donate to nonprofit organizations because they want to make the world a better place. They need to be sure that their money helps achieve that, and they want to know how exactly their donations are used.

Tell why you’ve chosen your mission, how you’re working towards your mission goal, and how donations impact its achievement. Focus on personal inputs of donors who are already working with you or are considering you as an organization that would efficiently use their donations.

Show recognition and appreciation

Whether you’re working with small sums or managing large amounts of donated money, be personal in your communication with your donors. Send acknowledgements timely, and focus on how each particular input helped you in your activities.

Highlight the importance of people’s donations! A phrase like “100 children now have books for their studies – thanks to your gift!” is not just a matter-of-fact statement: it also shows recognition of a donor’s input and effort.

A good practice is listing your donors and funding sources and making the list publicly available, for example on your website. However, if you have donors who want to remain anonymous, protecting their identity is your responsibility that directly affects trust.

Providing detailed reports to institutions that are funding your activities is not only important for accountability purposes, but also essential in terms of acknowledgement, as the reports show how the funds are used to achieve set goals.

Develop and adopt policies and procedures

Define clear procedures and policies, such as reimbursement procedures, conflict of interest policy, expense control, compensation, etc. Make sure they are documented and available to your employees, donors, institutions you’re cooperating with, and other parties.

Also, review your policies and procedures on a regular basis, and make changes to them if necessary. Make sure to inform everyone concerned about these changes.

Implement internal controls

Accurate numbers of how you’re using donated money and what exactly your employees are working on is a solid basis for trust and continuous cooperation. That’s why many nonprofits pay close attention to their internal control methods.

Keeping record of financial operations, budgets, work time spent on mission-related activities, outcomes of your actions ensures accountability and guarantees transparency of your activities. Running detailed reports on various aspects of your work is essential here: report data is important for you as an organization for better understanding of your results, your partners that fund your activities, and for tax authorities.

Publish your documents online

As we already mentioned above, such documents as exemption application, your annual reports, tax returns, audit results, etc. need to be provided timely to anyone who requests them. Make them easily accessible to everyone by publishing them online, timely update the documents themselves, and announce important updates in your news section.

Summary

Being clear and transparent is important in literally any field. For nonprofits, transparency is vital: building long-term relationships with donors and interacting with tax authorities is hardly possible without honesty and clarity. Providing donors, funding sources and authorities with clear information on your mission, vision and goals, and backing it with numbers inspires trust and allows to develop healthy and productive cooperation.