How to Optimize the IRS Form 990

Denise Henning

Three Tips to Transform This Document into a PR Win for Your Nonprofit

If your nonprofit is required to complete the IRS Form 990, it’s tempting to view this task as drudgery and to complete it with the minimum amount of effort possible.

But Form 990 is actually an exciting yearly opportunity for your nonprofit. Here’s why:

  • Filling it out generates most of the information you need for an annual report. So it’s a two-birds-with-one-stone exercise.
  • You’re not completing Form 990 only for the folks at the IRS. Your form will be a publicly available document that anyone can look up, download, and scrutinize. And they do. So you’re also completing it for your donors, your potential donors, the media, banks and creditors, vendors and partners, and your community. It’s a chance for you to speak to all of them at once.
  • It prompts you to list your financials, describe your mission and programs, and show your outcomes. Thus it’s a vehicle for illustrating your financial stability, shining a light on the people you serve and why, and touting your accomplishments.

Basically, the Form 990 is a powerful marketing tool for nonprofits. And when you approach completing it with an above-and-beyond mindset, you’ll help your nonprofit stand out from the crowd.

So today’s post is all about optimizing your nonprofit’s Form 990. We’re providing three tips that help you transform this document from a mere tax form to a PR showcase that enables you to build trust among donors, attract more of them, and raise more funds.

Here are those three tips:

  1. Demonstrate Financial Health through Ratios and Metrics
  2. Support Governance through Financial Policies
  3. Describe Your Program Accomplishments Using Data Analytics 

Demonstrate Financial Health Through Ratios and Metrics

In several sections Form 990, you’re required to enter financial information like revenues and expenses. While the form doesn’t ask for specific financial ratios, you should include them to illustrate your financial awareness, your in-depth financial visibility, your focus on strategy, and your overall financial health.

Here are some financial ratios and metrics to include on your Form 990. (For these you’ll want to use Schedule O, which is an additional form where you provide context, details, and insight that supplements the main Form 990 information.)

  • Program efficiency, which is program expenses as a percentage of total expenses. This shows your success at directing resources toward your mission rather than overhead.
  • Fundraising efficiency, which is fundraising expenses as a percentage of total contributions. This shows your ability to connect with and leverage a strong community of donors.
  • Net assets across unrestricted, temporarily restricted, and permanently restricted categories. This breakdown provides transparency regarding how available your assets are, how they are earmarked across the near and longer terms, and the limitations on their use.
  • Days cash on hand, which is the number of days your organization could operate using its current cash reserves. This demonstrates liquidity as well as your ability to meet short-term obligations, cover emergencies, and respond to emerging opportunities.

Bonus tip regarding financial ratios and metrics: you can also use Schedule O to include year-over-year improvements in ratios and metrics you provide. Financial improvement and efficiency gains demonstrate your nonprofit’s growth, scalability, and expertise. All things that donors love to see.

Support Governance with Financial Policies

Practicing good governance has always been critical in building confidence among a nonprofit’s donors.

Today, governance is more important than ever because donors have endless and ever-increasing choices for their charitable giving, and trust in institutions is eroding. It’s critical to show that you and your team are trustworthy stewards at the helm.

Turns out that Form 990 gives you an excellent way to do this: the Governance, Management, and Disclosure Section, which is Section VI.

So, in Section VI and Schedule O of the Form 990 (again, Schedule O is for additional information), you can demonstrate exceptional governance by including the following financial policies:

  • Reserve policy: Your practice regarding the minimum level of funds you designate for ensuring stable program operation and protecting your nonprofit against any financial instability or economic downturns. You also want to articulate your philosophy on the purpose of reserves and how you replenish them once you use them.
  • Investment policy: Your approach to investing your nonprofit funds, including your guidelines for asset allocation, risk tolerance, due diligence, mission alignment, oversight, and measuring success.
  • Revenue Diversification Policy: Your strategies for fundraising from individual donors, corporate donors, grants, and earned income streams. You also want to include your approach to diversifying and expanding revenue sources, building donor relationships, and stewardship. Note that Form 990 asks for fundraising information in other sections as well, such as Sections VIII (Statement of Revenue) and IX (Statement of Functional Expenses).
  • Debt management policy: Your practices for assessing risk, taking on debt, determining debt structures (including service patterns and interest types), deciding upon repayment terms (particularly maximum repayment terms), mitigating liabilities, and making financial decisions that are in the best interest of your nonprofit’s long-term sustainability.

Describe Your Program Accomplishments Using Data Analytics

Section III of Form 990 is titled “Statement of Program Service Accomplishments.”

It is the closest the IRS gets to saying, “Tell everybody how great you’re doing!”

A lot of people tend to think that government forms shouldn’t contain anything “extra.” While this is generally true, Form 990 is different. It pointedly asks for narratives. And you want to provide ones that illustrate your nonprofit’s mission and your success in implementing it.

In other words, you do want to be “extra” with this form. Section III (and of course the useful Schedule O for more information) is the place to do that. Here’s how to use storytelling in Form 990:

Use Statistics
When describing your program accomplishments, do so with quantifiable metrics that illustrate outcomes. Statistics build concrete and compelling narratives that highlight how effective your nonprofit really is.

For instance, if your nonprofit focuses on education, specify the number of students served, the improvements in their academic performance, their completion rate, their follow-on employment status, and any other measurable impacts.

Or if your nonprofit focuses on food insecurity, specify the number of meals served, adults and children fed, nutrition status among beneficiaries, income improvement among families served, reduction in community illness or hospitalization rates, your emergency response times, and any other impact metrics that show the difference you make.

And just like with the financial ratios we discussed earlier, include the year-over-year improvement in these stats if you can.

If you’d like help completing your nonprofit’s Form 990, Denise Henning, CPA would be honored to provide guidance for your team or fully take on the task. We’ll work with you to determine and calculate the relevant financial ratios, articulate the financial policies that support your governance, and tell your nonprofit’s story through statistics as well as the successes you’ve helped your clients achieve.

Ultimately, we’ll help you submit a Form 990 with a lot less stress. And it’ll be a form that you’re excited to talk about and show to all your stakeholders.

We can start helping in one conversation. Reach out to us today, or call us at (412) 719-8900. We look forward to hearing from you!