But making this allocation can be easier said than done since there is no standard methodology, and costs differ depending on a nonprofit’s programs and use of resources. Functional expenses in your organization are reported by their functional classification and recorded in your Statement of Functional Expenses (SFE). Your SFE is one of the four main statements you’ll utilize in your nonprofit, which also includes your Statement of Activities.

• It also includes the nonprofit’s net assets, which demonstrates the overall value of the organization, similar to the equity reported by businesses.
• Properly classified and recorded functional expenses allow the organization to appeal to donors and keep their nonprofit tax-exempt status.
• The square footage allocation example we used above is one common example of functional expense allocation.
• For additional guidance on accurately reporting your functional expenses, reach out to your local Blue & Co. advisor today.
• The chart of accounts can be expanded and tailored to reflect the operations of the company.
• With this categorization, stakeholders, including donors, board members, and even the general public, gain a clearer picture of the organization’s financial operations.

How to Make More Confident, Data-Driven Decisions in Your Business

It is a very common report in the financial world and you may want to add it to your in-house reporting schedule. Your auditor will expect to see an explanation of your functional expenses (although the required format may vary). You can use the following important ratios to help you understand and read the statement of functional expenses. The statement of functional expenses breaks down your expenses by category.

Budgeting for Nonprofits

Most nonprofit organizations that have more than one program find the SFE the most effective method of recording expenses. Your nonprofit’s statement of functional expenses is vital to an effective financial management strategy. While its main purpose is to ensure compliance with federal and state regulations, analyzing Law Firm Accounts Receivable Management it and applying the insights you glean to your expense allocation and budgeting provides even more value for your organization. While donors expect to see most of a nonprofit’s expenditures allocated towards program services, they might question a very aggressive program services allocation. Thus, when working on the allocation of functional expenses, an organization must have a thorough understanding of the correct methodology and processes in place. As with any other accounting-related matter, documentation to support the allocations is the key.

Resources

Whether you’re new or organizing your finances, you need to know how to set up a nonprofit bank account. Our blog post outlines several common mistakes, such as misclassification of expenses and lack of detail. We provide tips and guidance on how to avoid these pitfalls, ensuring that your Statement of Functional Expenses accurately reflects your organization’s financial operations. Allocating expenses is dividing overhead costs between all of the functions that are indirectly related to that cost. The statement of functional expenses square footage allocation example we used above is one common example of functional expense allocation.

A key component of this accountability-focused approach to accounting is compiling financial statements, which are documents that summarize your nonprofit’s use of funds. The Statement of Functional Expenses provides a detailed breakdown of a nonprofit organization’s financial activities. It includes components such as Program Services, Management and General Expenses, Fundraising Expenses, and Total Expenses. This statement actively provides insight into the effective use of resources to fulfill the organization’s mission. Understanding the statement of functional expenses is necessary for running a income statement successful nonprofit.

• Whether you’re a seasoned finance professional, a new nonprofit executive director, or just someone interested in understanding more about how nonprofits manage their finances, this guide is for you.
• The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more.
• An organization can have multiple program categories on the statement of functional expenses.
• This report would more accurately be called a Statement of Activities by Class (function) or a Line Items by Activity Report.
• A Statement of Functional Expenses is a matrix-style report that shows the breakdown of functional and natural expenses in an easy-to-read table.
• Because of this, the majority (75% is a good benchmark) of an organization’s expenses should show up in this category.

These are costs that have been incurred in a combined educational and fundraising campaign. Many organizations publish a monthly or quarterly newsletter containing both educational material and a fundraising solicitation. (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.

Definition and Purpose

Let’s say you rent a 20,000 square foot building for your nonprofit, which runs after-school programs in a disadvantaged neighborhood. An easy way to allocate these expenses if by having your volunteers and employees record what they do with their time. Examples of budgets used in business include the cash budget, sales budget, production budget, department budgets, the master budget, and the capital expenditures budget. Some budgets are designed to be flexible budgets, while others are static budgets. Since resource development is often ongoing, budgets may require frequent modification. Good accounting software will also allow directors to compare budgeted amounts to actual amounts and make the necessary adjustments.