Jim Sinegal, the founder of Costco, claimed he could tell the difference between a good Costco store and a great one within twenty feet of its entrance. His extensive experience in retail honed his eye for detail and gave him a powerful intuition about well-run operations. Wouldn’t it be helpful if we had similar clarity when evaluating nonprofits for our philanthropic dollars?
With nearly 1.5 million nonprofits in the United States, and approximately 50,000 more created each year, choosing which one to support can be daunting. After working in, leading, and consulting for hundreds of nonprofits, I’ve learned that while missions and operations may differ, the fundamentals of effectiveness remain consistent across sectors and budgets.
The essential questions and qualities for nonprofit evaluation can be distilled into nine key areas. The first two items help narrow down where to give, while the remaining topics provide a framework for deciding whether, and how much, to entrust to the organization. After the checklist, I’ll offer a perspective on the two most important—but often misunderstood—qualities of high-impact nonprofits.
1. Mission Alignment
- Does the nonprofit’s mission resonate with your values and goals?
- Does it address an issue you care deeply about?
2. Personal Connection
- Do you have a personal connection or experience with the nonprofit?
- Have you seen their work firsthand?
3. Leadership and Governance
- Is the leadership team experienced and credible?
- Does the organization have an engaged board and a clear strategic plan?
4. Financial Health
- What percentage of the budget is spent on programs versus administration?
- Is the organization financially stable with a diverse funding base?
5. Transparency and Accountability
- Are financial statements, such as Form 990, clear and accessible?
- Is the nonprofit transparent about how donations are used?
6. Effectiveness and Impact
- Does the nonprofit demonstrate measurable outcomes?
- Are there success stories that illustrate their impact?
7. Community Involvement and Reputation
- How is the nonprofit perceived within the community it serves?
- Does it have strong partnerships and endorsements?
8. Innovation and Adaptability
- Does the nonprofit innovate and adapt to changing circumstances?
- Have they scaled their impact or responded to new challenges?
9. Donor Relations
- Does the nonprofit acknowledge and appreciate its donors?
- How do they communicate with and engage donors?
Leadership and Governance:
In my early career, I consulted for a large metropolitan public school district tasked with identifying the primary drivers of success among its 100+ schools. Our initial analysis puzzled us: two of the top five schools were in the most disadvantaged neighborhoods, with the poorest facilities and fewest special programs. Upon closer examination, we discovered the common factor—exceptional leadership.
Leadership is the most critical element in evaluating a nonprofit because it directly shapes the organization’s vision, strategy, and effectiveness. Lean staffing requires the best leaders to have a wide breadth of experience, the hard skills necessary for administration, and the soft touch to be the face and chief fundraiser of the organization.
Effective leaders have a command of their industry, mission, operations, and finances. They ensure focus on the mission, efficient resource allocation, and adaptability. They inspire staff, volunteers, and stakeholders, foster a culture of accountability, and build trust with donors and the community. Without capable leadership, even the most well-funded nonprofit can struggle to operate efficiently and achieve meaningful impact.
Financial Health:
One of the most misunderstood metrics in nonprofit financial reporting is “administrative expense.” While nonprofits are required to follow Generally Accepted Accounting Principles (GAAP) in their audits, significant judgments are made in classifying expenses. Nonprofits know that donors often focus on administrative costs and may minimize these within GAAP guidelines. However, high administrative costs can reflect a commitment to quality, including investments in skilled staff and essential infrastructure. Paying employees competitive wages helps attract and retain top talent, which is crucial for the organization’s effectiveness and sustainability. Focusing solely on overhead can be misleading; instead, donors should assess overall outcomes, transparency, and long-term sustainability. Recognizing the importance of well-compensated employees is key to achieving lasting impact.
When discerning which nonprofit to support, especially with a major gift, consider walking 20 feet into their facility. Pay close attention to everything you observe. Engage in a conversation with a board member or someone from the leadership team. Donors should ask themselves, “What impact will my gift have on the short- and long-term aspirations of my personal values and philanthropic goals?” Smart donors use their head, heart, and gut to guide them. And the following year, they should evaluate whether the nonprofit demonstrated that their gift was appreciated and put to good use.