Giving 2.0™ Guide: The Art of Assessing Nonprofits

Overview

Nonprofit organizational assessments and funding recommendations are both complex and critical processes. Depending on the size of your gift and your capacity to conduct research, you will need to decide whether to do a top-line or more in-depth assessment of a nonprofit. For most funders, a top-line assessment is appropriate, which also helps limit the amount of time the nonprofit needs to spend providing information. 

A top-line assessment focuses on evaluating the “Big Three” capacity dimensions: 1) strategy and impact, 2) leadership and 3) financial health. While the Big Three are explained separately below, they are interdependent factors that all contribute to a nonprofit’s health and performance. For example, the financial health of a nonprofit may depend on the fundraising capacity of the CEO or executive director.

Some of the content of this Giving 2.0TM Guide is inspired by Silicon Valley Social Venture Fund’s (SV2) “The Art of Assessing Nonprofits” presentation on the Big Three, which SV2 gives annually to its partners. While there are hundreds of possible indicators to consider in assessing a nonprofit’s strategic and adaptive capacities, below is a curated list of “look-fors” and “red flags” for a top-line nonprofit assessment.   

“While financial analysis takes time, effort and acumen, it is an essential investment of your time to maximize the value of your financial contributions. Because a decision to invest in one nonprofit organization is a decision to not use those resources to fund countless other organizations. The onus is on us to make the best decision in service of the people whose lives we aspire to improve.”

-Laura Arrillaga-Andreessen, Stanford GSBGEN 580, 2021

Strategy

Strong nonprofits focus on results and nurture a high-performance culture in their staff. The board, executive director and staff all share a clear understanding of their short-, intermediate- and long-term goals, as well as the core strategies they use to reach those goals.

What to Look For 

Clarity of mission and vision: Taken together, these are the driving forces that give the nonprofit purpose and direction. 

  • The nonprofit has a clear mission and vision that is shared and broadly embraced by both board and staff.

  • The nonprofit can clearly articulate the problem it works to solve.

A strategic plan that informs decisions: This provides a nonprofit with a multiyear roadmap with clear short-, intermediate- and long-term goals. 

  • The strategic plan is designed with board, staff and other key stakeholder involvement, including input from primary beneficiaries and community members.

  • The strategic plan is widely supported and used throughout the nonprofit to drive programs/services.

  • The plan consists of SMART goals and matches the nonprofit’s projected financial and personnel capacity.

Red Flags

The nonprofit’s leaders, board and/or staff members are unable to articulate the nonprofit’s mission.

  • The nonprofit does not have a strategic plan or a commitment to creating one.

  • Key stakeholders, such as the board, were not involved in creating the strategic plan.

  • The nonprofit’s programs and goals are not clearly aligned.

Helpful Questions to Ask Nonprofit Leadership 

  • What does success look like for your nonprofit? 

  • Who was involved in creating your most recent strategic plan?

  • How often do you review, or refer back to or refine, your strategic plan?

Impact

High-performing nonprofits are intentional about incorporating learning, iteration and evolution into their strategy, and sharing knowledge to help prevent the incessant reinvention of the social change wheel. 

What to Look For 

Monitoring, evaluation and learning: The nonprofit has a culture of performance measurement, learning and adaptability, as well as a manageable set of clear, specific and compelling medium- and long-term goals. Goals should be SMART: specific, measurable, achievable, realistic and time-bound.

  • The nonprofit seeks feedback, especially from beneficiaries of its programs/services.

  • The nonprofit defines and uses short-, intermediate- and long-term progress indicators to help determine whether it is on track to meet its goals.

  • The nonprofit has an appropriate budget and staffing structure for its data collection and evaluation work (e.g., a line item for evaluation expenses).

  • The nonprofit’s leadership can describe successes, missteps and lessons learned.

  • The nonprofit has a culture and history of correcting course when conditions change or new information/evidence about best practices in its field becomes available.

  • The nonprofit does not talk exclusively about outputs and activities, but also outcomes and long-term impact.

    The nonprofit actively encourages and provides resources to drive experimentation, with new approaches and learning.

Early evidence of impact: The short-, intermediate- or long-term outcomes that the nonprofit has achieved are promising, given the nonprofit’s age and tenure of its programming/support.

Red Flags

  • The nonprofit’s stated outcomes are vague.

  • The nonprofit lacks progress indicators (or relevant progress indicators).

  • The nonprofit does not have methods for collecting and analyzing data on its performance or impact.

  • The nonprofit does not conduct internal evaluations of programs or only evaluates work to appease funders.

  • The nonprofit cannot articulate how it defines and/or measures success.

  • The nonprofit does not have a process for learning from its experiences.

Helpful Questions to Ask Nonprofit Leadership 

  • How are you doing against your top one to three key performance indicators?

  • What evidence is your programming based on? 

  • How do you measure and track your progress towards goals?

  • Approximately how much effort and resources do you put into monitoring and evaluating your work (e.g., budget)? 

  • What specific course corrections have you made based on your learning and evaluation?

References:

Amy Badiani, Jody Chang and Jen Ratay, “The Art of Assessing Nonprofits,” Silicon Valley Social Venture Fund, February 7, 2019.

 VolunteerHub blog, https://www.volunteerhub.com/blog/is-your-nonprofit-setting-smart-goals/#:~:text=SMART%20goals%20are%20specific%2C%20measurable,closer%20to%20achieve%20its%20vision.

 Alex Counts, “Spotting and Fixing Dysfunctional Nonprofit Boards,” Stanford Social Innovation Review, October 5, 2020, https://ssir.org/articles/entry/spotting_and_fixing_dysfunctional_nonprofit_boards. 

Leadership

The strength of a nonprofit’s leadership team—board, executive director, senior staff—is the driving force behind the nonprofit’s ability to manage itself well and ultimately achieve outcomes. Effective leaders support the staff’s professional development, manage executive transitions and steward a strong culture. 

What to Look For 

Board of directors: The nonprofit’s board of directors plays a critical role in fiscal oversight, goal setting, strategic decisions and fundraising. 

  • The nonprofit’s board is made up of knowledgeable, connected and committed individuals.

  • The nonprofit’s board is diverse along a number of lines—e.g., skill set, experience, age, gender, ethnicity, representatives of community and beneficiaries. 

  • The nonprofit’s board has a range of legal, management and financial skills.

  • The nonprofit’s board regularly reviews the organization’s strategic goals, programs and financial status.

  • The nonprofit’s board oversees, evaluates (annually) and collaborates with the executive director.

  • The nonprofit’s board performs regular assessments of its own performance.

Executive director: The executive director is the bridge between the board’s strategic oversight and the nonprofit’s day-to-day work.

  • The executive director inspires and leads the staff capably.

  • The executive director thinks strategically, adapts nimbly and focuses intently on outcomes.

  • The executive director is qualified, values-aligned and has a good reputation and network.

  • The executive director shares leadership and encourages a collaborative and inclusive culture.

Senior management team: An ideal senior leadership team is a high-functioning team of managers who work well together. They have the ability to take direction from the executive director, manage the staff and run day-to-day operations of the organization.

  • At least one member of the management team could replace the executive director if needed.

Red Flags

  • The board micromanages staff and/or cannot work productively with the executive director.

  • Board meetings are infrequent, held without a quorum or lack minutes.

  • The board has limited financial expertise.

  • The executive director lacks the experience, or training or support to run the nonprofit. Key leaders at the organization lack vision and/or a track record of success.

  • There is high turnover at the executive director or senior management level.

  • The staff's salaries are not at local livable wage levels.

  • There is no succession plan for leadership or other key members of staff. 

  • A 2020 SSIR article provides more information on models of dysfunctional relationships between the board and nonprofit leadership.

Helpful Questions to Ask Nonprofit Leadership 

  • What is the board’s level of engagement in the day-to-day operations of the nonprofit?

  • What does the board spend most of its time doing when it meets (e.g., financial oversight, fundraising, strategy, nonprofit operations, listening to staff reports, etc.)?

  • What are current areas of focus for the board? Why?

  • How does the board provide financial oversight?

  • How does the board assess its own performance?

  • How does the leadership team collaborate to evaluate the viability of emerging opportunities and initiatives?  

  • How have key metrics changed during the executive director’s tenure?

Financial Health

Nonprofits need sufficient financial resources to do their work. A nonprofit ideally has sufficient funding to conduct its current programming and a plausible future business model to sustain and/or scale its activities.

What to Look For 

Current financial state: A nonprofit has consistent and diverse sources of funding.

  • The balance sheet shows that the nonprofit has sufficient reserves available in case of unexpected expenses or decreased funding. 

  • The nonprofit breaks even or operates at a surplus year over year. (Note: Nonprofits will sometimes budget for a deficit in a given year for a number of reasons; therefore a deficit is not always “bad,” especially when the nonprofit has healthy reserves.)

  • The nonprofit has unrestricted, core financial support.

  • The nonprofit’s management and board members are fluent in the nonprofit’s finances.

  • The nonprofit conducts regular audits and the auditor has issued an “unqualified opinion” that the finances are fairly presented.

  • You can typically find an annual statement on a nonprofit’s website with these financial details or search for their Form 990 (IRS required tax filing) on a database such as ProPublica or Guidestar.

Plausible future business model: The nonprofit has a clear plan for raising sufficient funds to achieve its mission and goals.

  • The nonprofit understands its programmatic and operational costs.

  • The nonprofit has a long-term strategy and realistic plan to achieve its financial objectives, accounting for current giving trends.

  • The nonprofit’s staff and board members collaborate to raise necessary funds.

Red Flags

  • The nonprofit has a significant budget deficit and/or a growing deficit from year to year.

  • The nonprofit has declining levels of cash flow.

  • The nonprofit’s leadership cannot fluently discuss the nonprofit’s finances.

  • The nonprofit has no one on its staff or board with expertise in generally accepted accounting principles (GAAP).

  • The nonprofit’s financial statements are not reviewed by the board, or are out of date.

  • The nonprofit’s audits or financial reviews show areas of concern in financial management and/or indicate weaknesses in internal controls.

  • The nonprofit has a vague business model or no fundraising plan.

  • The nonprofit is financially dependent on a limited number of funders and/or relies largely on restricted grants.

  • The nonprofit’s revenue sources shift dramatically from year to year.

Helpful Questions to Ask Nonprofit Leadership 

  • How do you assess your current financial situation?

  • What are your biggest financial concerns?

  • Please describe the stability and diversity of your funding sources (e.g., the number and duration of your major grants and other revenue).

  • What are your contingency plans in the event that you do not meet your revenue targets?

  • What restrictions have your donors placed on their funding?