Avoiding a Black Eye as a NonProfit

When operating a nonprofit organization, one quickly learns that handling money wisely, is paramount. Even the smallest misstep can result in an embarrassing situation for the Board of Directors. CEO, and entire organization, particularly on a slow news day.  We hope this will help in avoiding a black eye when running a nonprofit.

In the nonprofit world, the functional expense schedule is used to allocate expenses by their function such as general and administrative, program, capital campaign and fundraising.  A nonprofit is required to allocate its functional expenses in this manner on their Form 990.  One of the positives about functional expense schedules is that donors are given more meaningful information about the type of programs and activities that the organization has to carry out its mission.

So how are these schedules created?

The Good News:

There is no right or wrong percentage for allocation.  However, comparing the ratios of similar organizations is of value and a way to benchmark how the organization is doing with its program versus supporting expenses. There are a number of websites that can provide benchmarking statistics such as:

• org – GuideStar USA, Inc.is an information service specializing in reporting on U.S. nonprofit companies. In 2010, their database contained more than 5 million IRS Form 990s on 1.9 million organizations. GuideStar was the first central source of information on U.S. nonprofits.
• Charity Navigator.org – An independentAmerican nonprofit corporation that evaluates charities in the United States.

The Facts:

• The method(s) used to allocate expense can vary from one nonprofit to another.
• There is no required method for allocation.
• However, consistency from period to period is important.
• Auditors will look to see that the method is reasonable, consistent and reviewed by management.
• Examples of allocation may include time study, square footage and actual usage, among others.D
• Documentation as to the method of allocation is also critical and should include allocation methodology, calculations used for allocations, basis of calculations (ie., square footage, time study, actual usage, etc.)
• Internal controls surrounding expense allocations should also be documented.

The Users:

• The IRS wants to see that the allocations are ‘reasonable” and consistent with the nonprofit’s mission.
• Potential donors will look at the efficiency of the funds to see minimal administrative costs, amount of fundraising efforts, and that the majority of funds are being used for programs/services. Common ratios in analyzing this include:  percent of program expenses to total functional expenses; percent of administrative expenses to total functional expenses and percent of fundraising expenses to total functional expenses.

The Conclusion:

The Statement of Functional Expenses on the 990 form is a key element of proper nonprofit financial reporting. Allocating these costs appropriately is the job of the organization’s CFO.  This statement gives the donor more useful information about how the not for profit is spending their money.  Because of this, every not for profit needs to pay careful attention to how it is allocating expenses in order to ensure it gives the appropriate message to donors and potential donors. A CFO will help make sure the assumptions used for allocation present the organization favorably when it is appropriate to do so.  An auditor/CPA will review the assumptions to make sure they are accurate and consistent.  CFO Strategic Partners has helped hundreds of not for profits manage their cash flow, allocate their expenses, and manage program and fundraising expenses.

Thanks to appalling scams like these, the public can often be skeptical of nonprofit operations and funds management. It is important to have confidence in your numbers and a third-party, objective team of professionals by your side.

For more on this topic or to discuss other financial needs, call us CFO Strategic Partners for a free consultation with our experienced team of financial consultants!