Functional Expenses

Posted on Wednesday, April 10, 2013

According to generally accepted accounting principles, all nonprofit organizations are required to report information about expenses by their functional classification on their financial statements in either the statement of activities or the notes to the financial statements.  IRS Form 990 also requires disclosure of expenses by function.  The presentation of functional expenses helps readers of the financial statements and 990 understand how a nonprofit uses its resources.

The three main types of functional expenses are program, management and general, and fund raising.  Both management and general and fund raising are considered supporting services.

Program services expenses are those costs that are directly and indirectly related to providing program services.

Management and general expenses relate to the overall operations of the organization and are not identifiable with a specific program, fund raising activity or membership development activity.

Fund raising expenses are those costs related to inducing potential donors to contribute to the organization.

Some expenses relate directly to a single program or supporting service (direct expenses), while others relate to multiple activities (indirect expenses) and need to be allocated between various services.  Nonprofits should apply a reasonable and consistent method of allocating indirect expenses.  For example, salaries and related expenses are often allocated based on time studies detailing how much time each employee spends on each function.  Rent and utilities are often allocated based on square footage.  Whatever method is used to allocate expenses, the method should be evaluated periodically to verify the allocation is still appropriate.

The percentages by function vary by nonprofit, depending on the organization’s size, age and location, as well as mission and programs.  Although the percentages vary, there are some recommended standards that third parties use to evaluate expense allocations.  The Better Business Bureau looks for at least 65% of total expenses spent on program services and no more than 35% of related contributions spent on fund raising expenses.  CharityWatch (formerly the American Institute of Philanthropy) views 60% or greater spent on programs as reasonable for most charities.  The 60% program percentage indicates a satisfactory rating from CharityWatch, while most high efficient charities are able to spend 75% or more on programs according to CharityWatch.  Charity Navigator ranks highest the organizations that spend 15% or less on management and general and 10% or less on fund raising.  The United Way of Allen County recommends no more than 25% spent on supporting services.  The average functional expense percentages for DWD nonprofit clients are as follows.

 

  

Management

  

Program

& General

Fund Raising

2011

72%

23%

5%

2010

74%

21%

5%

2009

75%

18%

7%

2008

78%

17%

5%

 

Potential donors normally want to give their money to organizations where they know their money is being spent wisely - a majority of the resources used to further programs and provide services, a minimal amount of administrative expenses and some fund raising efforts.   The presentation of functional expenses is one of the tools used to determine if the nonprofit is using its resources efficiently.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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