Allocating Functional Expenses For Your Nonprofit

Allocating Functional Expenses For Your Nonprofit

what are functional expenses

For example, the property insurance on the headquarters of an organization which includes space for programmatic activities and management of the organization should be allocated to those functional classifications. Insurance for a site where CARES Act only programmatic activities occur would be directly charged to program. Depreciation – Sometimes, organizations will include all depreciation in one function, such as management and general or program, when multiple functions are benefiting.

Part 9 of our 990 series covers everything you need to know about the statement of functional expenses. An alternative approach is the natural expense classification, under which expenses are aggregated and reported by their type.

what are functional expenses

For example, funding sources may allow audit fees and internal accounting and recordkeeping costs to be allocated to programs. However, under GAAP, such expenses are identified as management and general. Internal controls are financial management rules designed to deter the misuse of funds. They also prove to the IRS and your donors that your nonprofit has a system of checks and balances to stay in compliance. Internal controls can be as simple as requiring two signatures on a check to ensuring that expenses are reasonable (i.e., within the range of recent industry norms). The National Council of Nonprofits has a wealth of information readily available to assist you.

What Is The Functional Expense Classification?

Allocation methodologies should be reviewed for their reasonability and updated as significant changes occur. The statement of cash flows for a nonprofit organization is similar to that of a for-profit business. The SCF reports the organization’s change in its cash and cash equivalents during the accounting period. Make sure that the methodology for allocating expenses can be easily communicated to your auditors, board of directors, and anyone who is reviewing your financial statements. Next, we need to divide that amount by all three functional expense categories. This can be done by the area used by each category or by the number of people in each department, whichever is easier.

what are functional expenses

She delivers high quality client service by assisting firms with accounting and regulatory compliance. Organizations should review their accounting policies to determine whether their policies are consistent with the new standard. “100% of your contribution directly supports our program.” Although it would be impressive to be able to make this claim as a charitable organization, it’s impossible. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, LLC, an SEC Registered Investment Advisor. You should consider our materials to be an introduction to selected accounting and bookkeeping topics, and realize that some complexities are not presented. Therefore, always consult with accounting and tax professionals for assistance with your specific circumstances. Budgeting is also complicated when sources of support are not secured at the time the budget is prepared for the upcoming year.

Reviews are especially important in cases where the source of funding changes, or there is a change in the duties allocated to different employees. Reporting low management and general and fundraising expenses to give the appearance of higher than actual program spending. Fundraising expenses are typically the easiest to classify because they are expenses that are directly incurred as part of obtaining donations. Donations can include monetary donations as well as donations of goods, time, services, or other assets. It is considered best practice to provide your bookkeeper with functional expenses and account allocations for all transactions. Program Service expenses are the direct and indirect costs associated with furthering an organization’s exempt mission.

An Example Of A Statement Of Functional Expenses

Where it concerns the statement of functional expenses and the overhead debate, nonprofits can use this flexibility to tell a more sophisticated story. Fortunately, there is a way to both satisfy the new standard and go beyond it to present functional expenses in a manner more consistent with contemporary strategy cash flow and practice for nonprofit entities. This is an opportunity for CPAs to become advocates, helping nonprofits use the new standard to produce even more useful financial information for users. General and Administrative expenses are those related to administering the everyday activities of your organization.

what are functional expenses

Allocation of the employee salaries and benefits may be based on hours spent on the programs and supporting activities. Program services are the activities that fulfill the organizational purpose or mission and often relate to several major programs. Supporting activities are all activities of a nonprofit organization other than program services. The functional expense analysis allows users of the financial statements to better assess a nonprofit organization’s program efforts and their financial performance. In addition to disclosing its expenses, your organization will also be required to disclose the method used for allocating expenses among the functional classifications.

Depending on the natural expense type, you would want to use the methodology that would be the most appropriate. Functional expense categories include program expenses and supporting services such as management and general, fundraising, and membership development. Forgetting netted expenses on the Functional Expense Statement – Don’t forget to allocate expenses that have been netted against revenue sources on the statement of activities, such as the direct costs of special events or costs of goods sold. These expenses can appear as a reconciling item, below a subtotal that agrees to the statement of activities functional classifications.

Overview: What Are Functional Expenses?

Rely on your financial leadership to determine how best to assign these expenses in accordance with your chosen allocation method. To complicate matters, functional expense classifications can change over time. Like a for-profit business, a non-profit organization’s operations can change year-over-year, requiring that functional expense allocations be regularly updated to keep up with current activities. Otherwise, expenses can be misrepresented or fall through the cracks, resulting in misrepresentation of the organization to key stakeholders like grantors, donors, and boards of governors.

Such expenses don’t apply to the non-profit mission, which typically includes costs such as administration, bookkeeping, and governance. Program costs shall be any costs associated with managing a non-profit organization’s numerous programs and facilities, as per the purpose. Program expenses also account for more of the net costs of existing non-profits. Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable. Non-profits are required to have a Statement of Functional Expenses that is representative of their expenses throughout the year. Here are a few of the common mistakes when preparing the Statement and how to avoid them.

QuickBooks Online is the browser-based version of the popular desktop accounting application. It has extensive reporting functions, multi-user plans and an intuitive interface. You would just follow the same process to allocate the rest of the expenses. We would then add the additional $29.16 to that total to have the complete allocation for the month. Product Reviews Unbiased, expert reviews on the best software and banking products for your business. Best Of We’ve tested, evaluated and curated the best software solutions for your specific business needs. Accounting AccountEdge Pro AccountEdge Pro has all the accounting features a growing business needs, combining the reliability of a desktop application with the flexibility of a mobile app for those needing on-the-go access.

Given the attention functional reporting has received in recent years, management should place greater emphasis on this reporting and review allocation what are retained earnings methodologies more frequently. Most of a non-profit organization’s functional expenses will be program expenses, or at least they should be.

  • The financial statements’ note disclosure also requires the description of the methods used to allocate costs among program and support functions.
  • The key is the allocation methods used by management must be internally documented and consistently applied.
  • PrimeGlobal is not a partnership and independent member firms are not acting as agents of PrimeGlobal or other independent member firms.
  • It is important to remember these allocation methodologies are not limited to the natural expenses listed above and these are not the only methodologies available to your organization.
  • For example, a marketing coordinator may be hired solely for assisting with fundraising efforts and their time would be designated 100% to fundraising expenses.
  • Each group is looking at these allocations for potentially different reasons, but in general, they are all trying to determine how successfully your organization is fulfilling its mission and if you are being a good steward of your resources.

For example, the effect of utilities expense is caused by the amount of square footage each function occupies, so allocating utilities expense to each function based on this cause-and-effect relationship is appropriate. Similarly, the effect of officers’ compensation and benefits is caused by time and effort. In this case, you could allocate officers’ compensation and benefits based on hours spent on direct conduct or direct supervision of program services or other supporting activities derived from your time entry software. Administrative salaries are another example of indirect costs that may directly benefit multiple functions. A reasonable allocation method to use for these expenses include hours spent on direct labor for programs and services.

When timesheets are not practical, another reasonably accurate method of estimating how staff time is spent should be used. The final report that nonprofit organizations are required to run is the statement of functional expenses, which reports expenses based on functional classifications. There are no specific requirements for determining functional expense classifications.

Steps To Consider In Allocating Expenses Among Functional Classifications

The most common functional expense classifications within not-for-profit financial statements are program activities and supporting services. Program activities are those expenses that directly support the mission of the organization. Supporting services, which cannot be directly linked to one program, are further broken out into fundraising costs and management and general expenses. Users of the financial statements generally prefer to see a not-for-profit organization with the largest allocation of expenses as program activities.

For example, expenses could be aggregated by department and then reported as administrative expenses and selling expenses. Request that employees summarize actual time spent on different activities over a stated period of time and use this information as a basis for future expense allocations. For most not-for-profit entities, payroll and related costs are a significant portion of total expenses. Meticulous timekeeping is critical if functional expenses will be allocated based on time spent. When preparing the statement for your organization, make sure you are appropriately reporting the activities of the various programs within your organization and do not disaggregate a program unless required.

Employee time tracking allows the board, the IRS, and your donors to understand the employee costs of a given program. If your organization has low turnover, the allocation by headcount can be easily calculated at the beginning of the year. If an organization gets a significant amount of their income from donations, there is probably at least one employee whose sole job is to help raise money. When organizations have fundraising personnel, they need to take this into consideration when allocating the expenses associated with their salaries. Fundraising salaries should be allocated greatly to the fundraising category, not just to the management and general group.

Some expenses may be identified as direct expenses associated with a functional classification (i.e., the meals and the craft supplies provided for an after-school program). For example, a lease on a building that provides a location for a particular program is functionally classified as a program expense. Any costs related to program administration are functionally classified as supporting services expenses. Interest costs – Interest expense on debt is another expense we see organizations classifying as entirely management and general. Instead, the organization should allocate the cost to the benefiting program or supporting services. Since debt is usually issued for the construction or purchase of a building a reasonable allocation method could be based on square feet occupied. If costs cannot be allocated, the interest should be reported as management and general.

Employee Retention Credit or ERCs have the potential to provide significant, much-needed relief to your organization. Understand your Not-for-Profits eligibility, responsibility, and how to accurately account for the credit. We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day. Jake Klabenes is an Audit Director at Lutz with over 11 years of tax and audit experience. He specializes in audits of governmental agencies, specifically housing authorities, with additional experience in not-for-profit entities and low-income housing tax credit projects. This line is meant for any interest expenses incurred during the year, but not attributable to rental property or any mortgage interest, as those expenses are reported on a separate line. Courtney is a Senior Manager in Keiter’s Business Assurance and Advisory Services practice.

The Financial Statement lists all the debt’s values and valuation due to all the company’s properties. It also contains non-profit net assets, which display the organization’s total worth, equivalent to the businesses’ equity. what are functional expenses Nonprofits must learn how to record functional expenses correctly to ensure compliance with federal regulations. Management and general expenses support spending related to the financing of the organization’s daily operations.

Functional Expenses: Refresher And Tips For Not

Currently, Ann spends 25% of her time training, dividing her time equally between both programs. Based on these percentages, let’s allocate Ann’s salary, which is $4,000 per month. Accounting Accounting software helps manage payable and receivable accounts, general ledgers, payroll and other accounting activities. In the non-profit sector, the financial statement has a similar position to a company’s balance sheet.

Allocation Methods:

Program – the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs. A rational methodology must be selected and disclosed in the notes to the financial statements. The allocation methodology you select should be based on a cause-and-effect relationship between the allocable indirect costs and your allocation methodology. It is advised that nonprofits follow best practices when allocating functional expenses. Note that different application methodologies can be used for different expenses and the process is unique to each organization. However, ensure the methods chosen are reasonable, consistent from year to year, and documented.

Allocating Expenses

These include religious organizations, private foundations, or an entity that has no paid staff where most, or all, contributions arise from uncompensated board members soliciting contributions. It is the management’s judgement to select the methodology used to allocate expenses and determine its reasonableness. For example, allocation of rent expense may be based on the square footage of the space used for programs and supporting activities.

The fundraising cost is sponsorship of expenditures related to a charitable support or cash support call for an organization. This will cover the expenditures involved with fundraiser activities, direct mail campaigns demanding contributions, and fundraising staff compensation.