How Nonprofit Organizations Can Earn Legitimacy
by: Melissa S Burchfield
Nonprofit organizations (NPOs) play an important role in our society. From meeting basic needs to providing care, goods, and services, these organizations are vital to the groups they serve. In order for a nonprofit to thrive, especially in the first three-to-five years, the organization must been seen as a trusted part of the community. This is particularly true for nonprofit religious organizations. This paper will explain the necessity of proving accountability through business documentation, sound financial practices, and registration with the Internal Revenue Service in order to achieve and maintain legitimacy within their respective communities.
It is easy to get overwhelmed when the nonprofit is new. Oftentimes the need they are designing themselves to meet is great, and this can lead to issues right away. One of the biggest mistakes NPOs can make is to attempt to do the work on their own. As McLeod-Grant & Crutchfield (2007) point out, the secret to success for NPOs lies not in their own innate abilities but in their relationships with other organizations: “greatness has more to do with how nonprofits work outside the boundaries of their organizations than how they manage their own internal operations.” Relationships between organizations are called networks, and building a network, much like building a relationship, requires trust. Trust is a measure of the confidence we have in one another, and through trust-based partnerships, our organizations have an increased ability to help the communities we serve to flourish.
The religious nonprofit organizations have an even greater burden to prove legitimacy, since they are up against several difficult, negative opinions. Trust is a gift not often given to religious groups leading these organizations to fight harder to earn it. News stories speak of the actions of pastors and priests as though the behaviors of these leaders are indicative of every member of the faith from sexual indiscretions and color-blind racial attitudes to fraud and greed, the religious nonprofits have social stigmas to overcome that can be crippling if left unaddressed. Prominent and influential publications like Time magazine are even printing articles speaking out against religious organizations and their tax-exempt status (Oppenheimer, Time, 2015).
Overall, the goal is to create a NPO that has high accountability, because in the eyes of the public, legitimacy is the end-product of accountability. For-profit organizations typically have a single, unified goal: to make profits. Because of the government regulations surrounding business relationships, these organizations must create a system of checks and balances that prove to their consumers that they will be good stewards of their money. In a similar fashion, NPOs, depending upon the category, have reporting systems, but these are not often inclusive of the entirety of their operations. NPOs tend to focus heavily on their work with less attention to detail in operational documentation let alone providing an avenue to disclosure their business practices. In religious nonprofits, the amount of disclosure is often far less than for non-religious NPOs, suggesting, as Tremblay-Boire & Prakash (2015) point out, that “religious bonding enhances trust and reduces incentives for self-disclosure;” however, increasing the amount of information disclosed, including organizational documents and financial statistics, will help the organization stand out in the community and, more importantly, among the target populations (p. 693).
Accountability: What is it, and why do we need it?
Accountability is an aspect of governance in which the organization has a standard for assumption of responsibility for its actions including the quality of their products and services as well as ownership for failings on behalf of the organization or those acting in its name. The two sides of accountability are right action and responsibility: assurance that the organization will do the right thing and when there are issues that the organization will do due-diligence to correct or repair them. NPOs rely upon trust, as stated above, to build relationships and network in not only the third sector, but between organizations and individuals in the for-profit sector as well as the government.
J. Koppell lists five dimensions of accountability including transparency, liability, controllability, responsibility, and responsiveness (Anheier, 2014, p. 421). These five dimensions provide a means for nonprofit organizations to judge their own business structure and subsequent performance in administrative processes through the trust they receive from internal and external parties. Transparency is a term used to describe the overall amount of data an organization shares. Transparency builds trust through disclosure. Liability describes the amount of ownership the organization is willing to take of both positive and negative consequences for their actions. Liability confirms safety, a chief component of trust. Controllability shows that there are clear and predictable cause-effect relationships such that altering a cause will produce a predictable effect. Controllability illustrates organizational stability. Responsibility, similar to liability, exhibits an acknowledged obligation to follow the policies and procedures as dictated by organizational documents. Responsibility feeds into trust by further providing proof of integrity. Responsiveness, one of the areas where most young nonprofits are lacking, is the actual reply given to stakeholders such as employees, volunteers, consumers, and members of the target population in response to a concern. Responsiveness completes the trust matrix, because responsiveness is the action step that proves the other four dimensions are in working order.
Mission, Vision, and Standard Operating Procedures
The first step toward creating a NPO that is accountable is to create a series of administrative and business-based policies and procedures including a mission and vision statement and standard operating procedures. Creating these documents meets four of the five dimensions of accountability: transparency, liability, controllability, and responsibility. The mission statement explains what the organization is doing right now, and the vision statement explains what the organization wants to do next. Myriad examples of mission and vision statements are available from all of the different types of organizations, but how does one go about creating their own? When creating a mission statement, the idea is to provide a written statement that clearly defines the purpose and goals of the organization. This statement reflects why the organization exists.
An example from a nonprofit organization shows the concise language typical used to describe the purpose of their organization. Heifer International lists their mission statement as simple, “To work with communities to end hunger and poverty and care for the Earth” (Heifer, 2016). Some mission statements also include a short description of who they are to better illustrate their capabilities to meet their goals and achieve their future-state endeavors. It is with caution that a nonprofit mission statement provide additional detail. According the Top Nonprofits, LLC (2016), the best mission statements are “clear, memorable, and concise.” Their survey of the mission statements from the top fifty nonprofit organizations in America show that the most successful organizations have mission statements of less than twenty words. TED, the company who produces the less-than-twenty minute “TED Talks” videos, has a mission statement that contains only two words: Spread ideas (TED Conferences, LLC, 2016).
The vision statement, which may be separate or included as part of the mission statement, is a forward-thinking statement regarding where the organization is going. In other words, vision statements describe the desired end-state of the organization. Similar to mission statements, when Top Nonprofits looked at 30 vision statements, they found these to be single sentences made up of less than twenty words, as well. Examples from NPOs whose mission is to fight a disease have vision statements that reflect a disease-free world. Organizations like Habitat for Humanity have vision statements that show the end-state of the need they provide to their target group: “A world where everyone has a decent place to live” (Top Nonprofits, LLC, Vision, 2016).
Once the organization has these statements showing a concise purpose and clear end-state, the details on how to get there are filled in. The organizational policies and procedures ensure consistency in performance and quality. Procedures are step-by-step documents that explain the process by which a given outcome is achieved while the policies are principles of intent and guidelines for behavior of individuals, departments, and other special interest groups within an organization. A manual of standard operating procedures (SOPs) can be the means to success, especially when the bulk of the front-line work is performed by a rotating staff of volunteers. Examples of items that may be included in the SOP are instructions for signing on to the computer network, instructions for operating a piece of equipment, an explanation of the filing system used in a warehouse where material donations are collected or stored, and any of a wide variety of processes. Policies are descriptions of clear behavioral expectations. These include attendance policies, dress code, requirements for assessing the acceptability of a donation, and so on. Providing documentation of these processes will streamline the functionality of the organization through standardization despite high turnover of volunteer staff members.
With the mission and vision statements complete, the NPO can move forward with their plan for the future. How does the NPO get from where they are to where they are going? The strategic plan is the map. The idea is to turn the mission statement into achievable goals. Before the goals are written, the internal and external environments are assessed for viability. Next, the goals are chosen. They should relevant, realistic, and achievable in the current state of the organization. Then, the resources are allocated and the plan is put into action.
Finances: Integrity through Practice
Financial planning is a necessary evil in terms of organizing and maintaining accountability in money-handling. Too often the news reports show a mishandling of money that greatly affects the public opinion of the nonprofit sector. That makes money a high-pressure responsibility. The key to a sound financial plan is not only to include what to do and how to do it but also to include the whys in the process. Explaining why a task is necessary leads to a better understanding of the process and aids in accountability through responsibility.
First, list the resources. From where does the money come? This is the income. Second, plot out where the money is going. What was purchased and why? These are the expenses. Third, set financial goals. These will be the items the NPO will work to accomplish that need funding such as obtaining property, building a building, paid employees, etc. Once these are named, the plan can include saving funds for these specific goals. Finally, create a budget based on the income as well as the expenses with enough room to plan for the future. Be honest, even if the amount of expenses is higher than the income. This is common, especially in the first three-to-five years of the life of a NPO.
When the basic plan is complete, the next phase is to create a document that explains how to manage the financial process. A well-managed financial process shows integrity in business practices, which in turn builds trust with the community and the potential donors. Appoint or hire a treasurer, and if necessary, hire a consultant to work through the details. It may be necessary for a member of the current leadership team to take a basic course in accounting such as those offered through the Greater Washington Society of CPAs Educational Foundation who support a webpage entitled Nonprofit Accounting Basics (2016).
Internal Revenue Service: the 501(c)(3)
Nonprofit status is awarded by the Internal Revenue Service (IRS) office of Exempt Organizations. By far, the most common IRS classification is the 501(c)(3), which is the code for organizations that fall under the heading of “religious, charitable, and similar organizations” (Anheier, 2014, p. 63). These organizations must pass three tests to prove and maintain eligibility: the organizational test that ensures the entity limits their activities to those that further their purpose, the political test that ensures the organization maintains political neutrality in terms of advocating for or against any candidate for political office, and the asset test (the public support test) that shows the influx of funds is nor solely provided via an individual source or sole proprietor. Any organization whose support is provided by either a sole private entity or a sole proprietor shall be reclassified as a private foundation and must reapply after rectifying these circumstances (IRS 5180, 2015, p. 7).
The benefits of obtaining 501(c)(3) status are two-fold. First, 501(c)(3) organizations are tax exempt. That means these organizations are not required to pay taxes. Tax exemption includes not only the tax-free purchase of material items but also a relief from paying taxes on incoming donations. Second, donations made to the organization qualify as tax deductions for the donor, an incentive for giving. In order for these donations to be claimed on their tax returns, the 501(c)(3) organization must provide a receipt for their gift (IRS 1771, p. 1). This is an important step in preparation for the nonprofit to increase the income necessary to meet the needs in their budget as defined above.
Fundraising is an important part of managing a nonprofit organization, especially if the NPO is not currently the recipient of grant or other governmental monies. It is a staple of the nonprofit world. After the financial planning process and 501(c)(3) status are in place, the NPO is ready to receive donations. Most NPOs begin their fundraising endeavors through a “guerilla-style” technique that relies solely upon direct solicitation through explaining the NPOs mission and services provided (Anheier, 2014, p. 363). This style generates one-time donations and is not usually enough to sustain an organization for long. These funds do, however, enable the organization to solidify and begin to grow. The next phase of fundraising is normative in that potential donors are solicited to include previous donors, donors who are alumni, volunteer staff, organizations who have an affiliation to the NPO in some way, or other related parties (Anheier, 2014, p. 365). At this stage, the NPO has gained enough experience in soliciting funds that they may begin working toward directed donation funds to meet a specific organizational need such as a building fund to secure additional space for operations. Finally, the NPO enters the integrative phase. This part of the process shows the NPO soliciting funds based on the vision and earned place the NPO has in the community (Anheier, 2014, p. 365). The tone of the solicitations change from being an introductory explanation to one of continued growth and solidarity in the community.
Branding, Advertising, and Marketing
In order to solicit funds, the NPO must be able to clearly and concisely articulate who they are, what they do, and where they are going. Branding is a marketing strategy that helps the NPO create an image as a means of establishing a presence in the mind of the community members. The work of creating a logo and simple statement is crucial to the beginning of any fundraising process. A logo is a design that says something about what it represents without words; it is a symbol that will eventually stand alone as the voice of the organization in the community. When consumers hear the names like Pepsi, Coca-Cola, McDonalds, an image appears in their mind. This is the result of the branding efforts of these companies. In the nonprofit sector, similar images appear when the community hears Habitat for Humanity, American Red Cross, the World Wildlife Foundation, and Autism Speaks. Nonprofit brand design is crucial to reaching the right population. Before a NPO decided on a brand, the mission statement must be clearly defined. Then, the leadership team decides what image they want associated with their organization.
Once the logo and pseudo-slogan are chosen, the next steps are to build an effective website. From here, transparency becomes one of the key players in building your network. Here is where all the pieces that have been created are put together to form a portrait of the organization. The website will be the place to house the mission and vision statements as well as a synopsis of the organizational documents, calendar of events, and other networking tools to inform the community of all the things being offered through the NPO. Key players in the leadership are encouraged to use Facebook and Twitter accounts to share stories, and it may be profitable for the NPO to have their own accounts, depending upon the target group they serve or the interested persons from whom they solicit funding. If there are teaching moments or habitual tales to tell, a Podcast may assist with exposure. The idea is to get the name of the NPO out into the Aether of the internet. Another option is to engage in cause marketing in which the NPO forms an alliance with a for-profit organization for mutual benefit (such as a for-profit donating a dollar or any such item to the NPO per purchase of one of their goods or services).
Customer Service: The Key to Responsiveness
Finally, customer service is not limited to the fields of the for profit industry. In the nonprofit sector, customer service not only serves the needs of the constituents, but also those of the donors who fund the programs. Henry Ford once said, “It is the customer who pays your wages.” In the nonprofit sector, it is the donor who funds the mission. Effective communication is of primary importance in responding to donors and constituents with speed and clarity of speech as well as kindness and compassion. Not matter how perfect the branding or how grand the marketing scheme, no matter how good the services or robust the volunteers, if the customer service is lacking, the nonprofit will not sustain a viable donor pool. There are several key methods to ensuring quality customer service, even when the organization does not provide a good for the money they receive from their constituents. First, recognize loyalty among the donors. Recognize repeat donors for their generosity. Second, empower the staff and volunteers to help in building a culture of positivity. Third, include actual statistics from reliable data when discussing metrics with potential donors and allies. Finally, include the potential donors as stakeholders when making decisions as an organization. When the donors feel their voice is heard, they will be more inclined to assist in funding the operation.
Accountability is the way to legitimacy for the nonprofit organization. When trust is built through transparency, liability, controllability, responsibility, and responsiveness, many doors will open to allow success to enter in. The road is not easy to travel, but consistency in practice and integrity in process serve to build the trust a nonprofit needs to build a name for themselves in the community they serve.
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