Preparing the statement of functional expenses relies heavily upon management estimates and can be a daunting task. However, there are accounting guidelines to help guide this process. Below are five key considerations to keep in mind when preparing your organization’s statement of functional expenses.
- Ensure proper allocation methodology
Review your organization’s allocations of indirect or shared expenses and ensure that your methodology is appropriate. Consider whether there is a better way to allocate any expenses.
- Identify expenses that are solely management & general
Program expenses are those that directly further your organization’s mission. There are multiple expenses, such as accounting and audit services, that, while essential to operations, do not directly further the mission and are therefore considered 100% management & general. Ensure that these expenses are appropriately identified and not allocated to program.
- Don’t over-allocate expenses to management & general
It’s not uncommon to see nonprofits allocating the full amount of expenses such as occupancy, depreciation, and insurance to management & general. However, these expenses are often a combination of program and management & general costs and should be allocated accordingly.
- Pay particular attention to payroll
Payroll is often the most significant expense for nonprofits and can be one of the more difficult expenses to allocate. For administrative positions, consider whether any portion of these employees’ responsibilities can be classified as program. Particular attention should be given to the Executive Director’s salary allocation, as this is generally the highest salary and often has a mix between program, management & general, and fundraising.
- Consider fundraising expenses
Many organizations with minimal fundraising expenses may not break these out as a separate column in the statement of functional expenses. If your organization receives contributions from the public and fundraising expenses are not broken out in the statement of functional expenses, consider whether it makes sense to add a fundraising column to the statement. If not, an explanation as to why should be disclosed in the financials.
- Put a spotlight on your programs
If your organization has multiple significant programs, consider breaking these out into separate columns in your statement of functional expenses. Your organization’s financial statements are publicly available and providing this detail is a chance to better tell your story.