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FUNCTIONAL EXPENSE REPORTING

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By Amanda Newkirk, CPA Senior Accountant

In many nonprofit organizations you will find management and boards of directors who are concerned with expenses and whether or not those expenses are in line with other organizations of a similar size. Additionally, the donors giving money to these organizations want to ensure those funds are being used prudently. Various watchdog groups publish recommended guidelines to follow as a benchmark that may be relevant to your organization's size and mission.

FASB ASC 958 (Topic 720-05 Other Expenses Overview and Background) requires the presentation, in either a statement of activities or the notes to the financial statements, of information about expenses reported directly by their functional classification, such as major classes of program services and supporting activities. Program services are defined in the FASB ASC glossary as "the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the nonprofit exists. Those services are the major purpose for and the major output of the nonprofit and often relate to several major programs." Supporting services are defined in the FASB ASC glossary as "all activities of nonprofit entities other than program services." Generally they include management and general, fundraising activities, and membership-development (if applicable).

When analyzing financial statements, one must keep in mind the users of the financial statements. Typical users of nonprofit financial statements are contributors, members of the board, regulatory agencies, lenders, and charity watchdog groups. The users of the financial statements are typically interested in the expenses used for various programs and services the organization provides. They will examine the amount of fundraising expenses as it relates to overall expenses as well as management and general as it relates to overall expenses.

You might be asking yourself what expense percentages are reasonable. While there are no rigid rules regarding these percentages, charity watchdog groups do provide certain guidelines on some benchmarks that they believe to be reasonable. These ranges primarily apply to 501(c)3 organizations that have been analyzed in terms of their expenses. Some of these groups recommend that a nonprofit have 60-65% of overall expenses be used on program-related expenditures while no more than 35-40% of overall expenses are used on management and general and fundraising combined. A good indicator of efficiency to raise funds would be how much an organization would spend to raise $100. In one watchdog group's opinion, a nonprofit organization should generally spend $35 or less to raise $100. An organization's "years of available assets" is another important indicator to monitor when analyzing prudent use of assets for the organization's exempt purpose and mission. The same watchdog group (the American Institute of Philanthropy) believes a reserve of less than three years to be reasonable.

Nonprofit organizations' Form 990's are readily available in a number of places online such as each organization's website, GuideStar.com, and various other websites. Watchdog groups look at the most recent 990's available and perform various studies and research on the findings. Keep in mind that there are many reasons why nonprofits have different levels of expenses, due to organization size, mission, and available resources. We hope you will find this information useful in looking at your own organization's expenses and developing appropriate guidelines to attract and retain contributors.

Sources: The American Institute of Philanthropy's website at http://www.charitywatch.org/ and the Better Business Bureau website at http://www.bbb.org/us/charity

 

If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE

 

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