Subscribe to our free email updates to get nonprofit tips, resources and freebies sent directly to your inbox. Nonprofit Cost Analysis Toolkit. A nonprofit leader who runs a single program but is administering it at multiple sites can. The guide and accompanying spreadsheet template break down the process of understanding true program costs, either through budgeting or financial reports, into several stages.
Let’s look at two very different types of costs or expenses that your organization will incur: Program costs versus Administrative costs.
Expense Allocations of Nonprofit Organizations Mc. Konly & Asbury: Certified Public Accountants. Nonprofit organizations are subject to a unique accounting and reporting requirement that requires the reporting of expenses according to the purpose for which they are incurred.
Supporting service expenses are further broken down into the categories of management and general (administrative) and fundraising. Expenses are directly applied to one of these functional categories, or indirectly applied through an allocation process and plan. Possessing an understanding of the different functional categories is crucial to an accurate functional allocation plan. The functional categories can be summarized as follows: Program Service Expenses – These are costs related to providing the nonprofit organization’s programs or services in accordance with its defined mission.
Learning how to calculate overhead for a nonprofit can help your charity stay afloat by allowing you to create an effective. Creating a list of your nonprofit's overhead costs can help your organization. Six Ways to Fund Admin & Overhead Costs. Government Accountability Office study of nonprofit treatment of management and other indirect costs. NAO and other nonprofit sector advocates are working to change both the.
The public generally prefers to see a nonprofit organization with the largest allocation to this category. Management and General – These are costs related to administering the day- to- day activities of the nonprofit organization. These expenses do not directly relate to the purpose for which the organization exists and typically includes activities such as bookkeeping, management, and governance. While important to the operation of the nonprofit, organizations generally try to minimize these as much as possible. Fundraising – These are costs of all activities that relate to an appeal for financial support or for a contribution to an organization. Examples of these expenses are the costs of holding a fundraising event, solicitation of contributions, or salary of individuals involved in the fundraising process.
Before a nonprofit organization can perform a functional allocation, it needs to understand the importance of reporting of expenses on a functional basis. The answer has to do with the users of the financial statements. While management is generally concerned with natural classification of expenses (salary, office expense, travel, etc.), users of the financial statements, such as potential donors, funding sources, regulators, and the governance board, are interested in understanding the relationship between an organization’s program expenses and its supporting expenses.
This helps the user of the financial statements answer the “why” question regarding an organization’s expenses. Consider the following example: A nonprofit organization receives and pays an invoice for office supplies in the amount of $1,0. This cost is initially recorded as “supplies expense” on the organization’s statement of activities (profit and loss statement). Normally, this type of expense would simply be considered a cost of doing business. However, by digging a little deeper into the invoice, what if only $1.
At year- end, the functional allocation is prepared and this invoice is now reported as follows: Program Service Expense – $6. Management and General – $1. Fundraising – $3. It is now clearer to the user of the financial statements that the $1,0. Some best practices and critical elements of a functional allocation plan are: Document the functional allocation plan in writing.
It is important that the methodology for allocating expenses can easily be communicated to the organization’s governance board, the independent auditors, and the users of the financial statements. By documenting this plan in writing, it makes it easier to understand and update, when needed. Identify the type of expense transactions that are directly allocated to one of the functional categories, or that need to be allocated amongst several categories. Further, if there are multiple program service offerings, it is important to identify the type of expense transactions that are directly or indirectly allocated to each program.
Accurate cost allocation between programs can be important for grant reporting purposes and for determining the overall success of a particular program. Maintain timesheets for individuals whose responsibilities include tasks that fall into more than one functional category or program. The time sheets should approximate the amount of time in a given week (or month) that the individual spends on program type services, administrative services, and fundraising services.
It is important that the individual maintaining the timesheets understand the definitions of the functional categories and the difference in programs. If an allocation of time is not practicable, which is often the case with rent, utilities, and other space related costs, allocating by square- footage is an acceptable alternative.
Establish a chart of accounts within the accounting system that can help facilitate the allocation process in an efficient manner without providing a burden to management at year- end. Remain consistent with the functional and cost allocation plan. Special exceptions to the plan should be minimal. Review the allocation methodology at least quarterly.
It is not uncommon for the funding stream of nonprofit organizations to change or for there to be a change in the make- up or responsibility of personnel. If you have any questions regarding your organization’s allocation plan or an allocation plan for an organization you are involved with, please contact Jim Shellenberger, Senior Manager with Mc. Konly & Asbury, at jshellenberger@macpas. We hope you enjoyed this article from Mc. Konly & Asbury.