As a nonprofit organization, the last thing on your mind is probably the statement of functional expenses. Although this statement doesn’t get a lot of recognition, it is a valuable management analysis tool that can help tell the story of your organization’s mission. My goal by the end of this post is to increase awareness of the benefits of the statement of functional expenses so that you feel prepared to fully utilize it to your organization’s benefit.
What is the Functional Expense Statement?
The statement of functional expenses is required for U.S. GAAP reporting purposes and is a meaningful matrix of the organization’s disbursements divided by function (type of purpose) and natural classifications (type of expense incurred). The functions are listed by the program(s), fundraising or development, management, and general/administration.
Best Practices in Preparing a Functional Expense Statement
When preparing the statement for your organization, make sure you are appropriately reporting the activities of the various programs within your organization and do not disaggregate a program unless required. For example, if you would classify a certain activity as a program for a grant budget request, but also report it as a major program in Form 990, keep it as a major program to simplify the process so that your data isn’t as scattered. Your organization’s management, general counsel, fundraising and development are always the main support and key pillars of the program(s) outlined in your statement. Nevertheless, make sure your reports are proportionately correct to the size of your program(s).
The allocation of all expenses within the statement should be well reasoned and the final decision to how expenses were allocated should be properly documented. For example, time spent can be an allocating method if the program has a seasonal aspect to it, such as summer camp. Allocation methodologies should be reviewed for their reasonability and updated as significant changes occur.
There is no prescribed number of natural expense classifications that need to be shown in the statement, but organizations should consider the significance and relevancy of their expenses, as well as the needs of the users of the financial statements. Typically, somewhere between five to ten natural classifications are shown in the statement.
Using Your Statement as a Guide
Once complete, an organization can compute a line total to calculate the final percentage of the total by both function and natural classification. Analyze and interpret these percentages as the tea leaves of your organization. What do they tell you? Does the statement tell the story of the organization? Does the presentation make sense based on related funding received? We recommend looking at the statement on a regular recurring basis. Monthly or quarterly will be more beneficial than just once annually at year-end.
Make this statement a tool used to manage and tell the story of the organization and you will see your organization in a different light each time you delve into it. It’s the reason I encourage nonprofits to fall in love with their functional expense statement, it’s a great reminder of your nonprofit’s initiatives and why your organization’s mission matters!
Curious to learn more about other accounting services specifically for nonprofits? BerganKDV can help. Contact us with your nonprofit-focused accounting questions and our team of experienced industry leaders will assist you. Or we encourage you to attend an upcoming webinar hosted by our nonprofit solution leaders where they will discuss the current landscape of nonprofits and dive into the accounting and tax topics impacting organizations the most.