Get to Know Your Functional Expenses by Area
Nonprofit organizations have to do more than simply report their expenses—if only it were so simple! Thanks to an accounting standard called ASU 2016-14, you have to report expenses according to their purpose. It’s a process called functional expense allocation, and it’s a pain point for many nonprofits.
Functional expense requirements
All nonprofits have to categorize every expense by its function, or purpose. Typically, that means separating expenses for programs, management (general and administrative), and fundraising:
- Program expenses, or dollars spent on providing programs, probably make up the bulk of your yearly expenses.
- Management expenses refer to the cost of administering everyday activities, including governance, accounting, and insurance.
- Fundraising expenses encompass all activities related to development, from salaries to postage.
Make expense reporting better and easier
Your financial statements are read by donors, board members, rating agencies, grantors, and others. Needless to say, the statements matter—a lot. Reviewing your statements, including your functional expense allocation, helps those inside and outside the organization determine whether your organization is fulfilling its mission and being a good steward of resources.
Given how much your functional expense allocation matters, it’s important to be able to calculate the expenses from across the organization easily and accurately. Bar graphs and other visualizations can also help you demonstrate how expenses have changed over time, by area, and gain insight into areas of concern and growth.
One way to get all the services you need is to outsource to an experienced provider that uses a cloud-based, business-wide accounting software solution like Sage Intacct. Sage Intacct provides multiple methods for allocating functional expenses by area, making it easy to create, edit, and present expenses in different ways—and access the information you need anytime, anywhere.
With the help of Sage Intacct, a nonprofit like a Boys & Girls Club could, for instance, not only separate expenses by program but also easily compare the revenue, expenses, and members served in each program to identify which programs are having the most impact. Customizable dashboards make it fast and easy to do. Plus, they could easily import non-financial data from Donor Perfect and other sources and use that to drill down into membership numbers across programs.
Insero & Co. is a public accounting firm with decades of experience working with businesses and nonprofits. Our experts provide customized consulting services, including end-to-end business optimization services for businesses of all sizes. We can also serve as an extension of our clients’ accounting departments and fill specific positions to meet immediate needs. Whatever your needs during these challenging times, we’re here to help.