First things first: Why is functional expense reporting so important?
Your nonprofit organization may be a beacon of hope to a cause that would otherwise have been overlooked. But like most nonprofits, your good intentions most likely rely on the right kind of donations to keep your cause running.
The funds you generate depend on a number of factors. From your organization’s website, to the ease of which potential donors can donate, to the way your organization maximizes its outreach – everything matters.
So where does a functional expense report fit into all of this?
Well, the functional expense report is essentially another way to look at how the organization is representing itself in public. Everyone from donors to charity watchdog organizations and funders rely on financial indicators to evaluate the worthiness of a nonprofit.
Think about it – wouldn’t you feel more confident about donating to an organization that had a clearly outlined report of how it utilizes its funds in comparison to an organization with muddy, haphazard financial statements?
This is why it’s essential for nonprofit organizations to generate a functional expense report that is clear, well documented and makes it easier for potential donors to see how expenses actually relate to fulfilling the organization’s mission.
Quick Overview: What does a functional expense report look like?
A standard functional expense report will have three broad categories:
1. Program Costs
These are the costs incurred while running the programs on the organization’s overall mission.
2. Management and General
These costs may not relate directly to the organization’s purpose, but are essential to the daily running of activities. This category includes salaries for management, rent, bookkeeping, administrative costs and governance.
Pretty self explanatory – these costs refer to any expenses incurred during activities aimed at generating funds for the organization. These may include events, advertisements, and payments to individuals or organizations that aid fundraising activities.
Mastering the Art: How to make the most out of your report
Just having a functional expense report isn’t enough.
You don’t need people to see that you’ve documented your funds; you want them to see how you’re maximizing them.
It may give a good impression to have majority of your expenses listed under ‘Program Costs’, but sometimes an expense can relate to more than one function. You need to review your allocation methodology to make sure you’re accounting for that.
Don’t wait until you have to write your next report, update you expenses and changes in the organization as you go. This can include changes in staff, addition of any debt or an addition/relocation of space.
Don’t Forget Expenses!
Insurance, depreciation of assets, and personnel costs are all a part of functional expense reporting – don’t leave them out!
Double, Triple Check
Discrepancies between functional expense reporting and audited financial reports will reflect badly on your organization. As will downplaying your fundraising costs when you’ve accounted for contributed revenue elsewhere.
Remember – the devil’s in the details! Paying attention to things like category allocation and costs that may seem irrelevant or unimportant is going to make all the difference at the end of the day!