How To Allocate Functional Expenses for Nonprofit Organizations

Fundraising expenses are incurred through the solicitation of contributions, gifts, and grants. These expenses include the efforts to collect both cash and non-cash contributions. Common expenses that appear as a fundraising expense include the postage for appeals and letters, acknowledgment letter creation, and the wages paid to the development director.

Allocation Methods:

And the other 85% of your rent would be allocated to program expenses, as in the example above. Functional expense reporting is the process of tracking the money you spend according to what the money was used for– like fundraising, administration, or programs. In this article, we’ll break statement of functional expenses it all down to show you what functional expenses are, why they matter, and how to track them in your organization.

Functional Expenses vs Natural Expenses

Functional expenses are reported by their functional classification and recorded in a Statement of Functional Expenses. This method of expense reporting is most commonly used by nonprofit organizations. Because the details of this report are highly dependent on your organization’s unique financial situation, pulling it together can be challenging. The best way to ensure your statement of functional expenses meets reporting requirements and accurately represents your nonprofit’s spending is to work with a nonprofit accountant. Program Services are the costs related to providing programs in accordance with your organization’s mission. Ideally, the majority of your nonprofit’s expenses would be allocated to programs.

• Using detailed a chart of accounts, maintaining organized records, and regularly reviewing and reconciling accounts can also help prevent this mistake.
• Costs that can be readily identified as pertaining to a specific category are charged directly to that function.
• The square footage allocation example we used above is one common example of functional expense allocation.
• This statement offers a more detailed breakdown than the traditional expense statement, allowing stakeholders to evaluate the cost of carrying out the organization’s mission.
• The result should be a useful, transparent display of expenses that are comparable.

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(Actually, many organizations add a solicitation request to every mailing.) This type of publication is subject to the “joint cost” allocation process. If you are sending material out to the public that is partly educational and partly a solicitation for support, you must be aware of the “joint cost” rules. If you have any questions about joint costs, check out our blog “Is My Nonprofit Allocating Restaurant Cash Flow Management Joint Costs Properly? Part 9 of our 990 series covers everything you need to know about the statement of functional expenses.

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• For instance, a lower-than-expected Program Expense Ratio might prompt a review of spending priorities, leading to strategic adjustments that allocate more resources to program services and, ultimately, increase mission impact.
• The campaign includes email marketing activities, printing broachers, and pamphlets, related to fundraising activities, etc.
• The Statement of Functional Expenses is a key financial report that provides this detailed breakdown.
• With expert guidance and ongoing support, nonprofits can maximize their investment in Financial Edge NXT, enhancing overall financial management and accountability.

There is no limit to the natural categories you might want to display on your Statement of Functional Expenses. Consider what aspects of operation are most prominent and important to your organization. If you are required to file a Form 990, consider the natural expenses outlined on Part IX and how your current accounts fit into those categories. These costs are crucial to track as they directly reflect the impact and success in achieving its stated goals. They also give donors and stakeholders a clear understanding of how they are using funds to serve the community or cause. Nonprofit accounting software is game changers for organizations striving to manage their finances with precision, transparency, and efficiency.

What is a Statement of Functional Expenses?

In nonprofit organizations, these expenses are made solely to carry out operations. Functional expenses are the classification of an expense to understand its function. Nonprofit businesses also normal balance require mandatory accounting of their transactions and money flow. If you are curious to learn about accounting at a nonprofit organization, functional expenses are where to start.