It is important for those involved in nonprofit accounting, management, and even donors to understand nonprofit functional categories. Functional categories, when properly used, provide valuable information about the nonprofit’s efforts in programs, management, fundraising, and membership services. To accomplish an accurate depiction, it is important that you understand how revenue and spending fall into each functional category, which is what I will discuss in this article.
Nonprofits exist to provide a service and advance their mission. They accomplish this through their programs. Most nonprofits will have several programs that all serve the mission in some aspect, while some, such as churches or small startup nonprofits, may only have one program.
First, let’s look at program revenue. Nonprofits obtain program revenue by (1) raising contributions through a specific campaign (which results in donor-restricted contributions), (2) applying for grants, and (3) receiving contributions that are restricted for purpose. It is best practice to code these revenues to an appropriate class when they arrive and to add them to your net assets roll-forward to be able to track restrictions more easily.
Program expenses are expenses that directly support the programs. This includes individuals spending time directly working to accomplish program services and the cost of goods to provide the program services. Some expenses may not be direct expenses of the program but instead serve multiple functions. These types of expenses, such as building depreciation or communications expenses, should be allocated among all the functions that benefit using a reasonable method. We will talk about this later.
Rarely do nonprofits receive revenue specifically for management and general Rather, management and administration encompass the expenses that are required for the nonprofit to operate. Some common expenses and activities included in management and general include:
It is best to think of management and general expenses as those that are not program, fundraising, or membership development expenses.
Often, contributors and the board look to minimize management and general expenses as much as possible. But as you can see, these often include services that are valuable to the proper operation of the organization. I would be skeptical if I saw an organization with an unusually low percentage of management and general expenses because either
Similar to management, general fundraising should generally not have revenue associated with it. Any revenue brought in through fundraising should be unrestricted contributions or donor-restricted contributions as the result of an event or a campaign.
Fundraising expenses include those for the sales and marketing of a nonprofit. Some common fundraising activities and expenses include:
It is important with fundraising campaigns to track the expenses incurred as well as the revenues brought in as a result. It is often easiest to maintain this type of tracking either (1) in a donor database or (2) in a spreadsheet.
Note that a lot of associations and some churches may not have any fundraising expenses. Associations derive their revenues from membership dues rather than contributions. Churches often rely on their congregants to donate and do not spend any significant amount of money on marketing or soliciting funds.
Like management, general and fundraising membership development generally should have revenue associated with it. Revenue brought in through membership development is likely going to be exchanged revenue and will be unrestricted.
Membership development activities include those needed to obtain and maintain member relationships. Some common membership development activities and expenses include:
Note that expenses related to selling additional goods or services to members would be included in management and general activities.
Now that we have looked at what types of expenses are included within each of the functions, let’s go through some examples.
The Leaf and Bean Conservatory’s mission is to spread awareness of the uses and benefits and preserve the variety of coffee and tea plants. During the past month, the Conservatory (1) held a plant exhibition to raise awareness about the Conservatory’s mission and teach locals about the best plants for indoor growing; (2) hired a new accounting manager whose primary function is to review the accounting, prepare budgets, and oversee the staff accountants; and (3) published an informational pamphlet about various herbal tea recipes and benefits.
How would each of these activities be classified?
The Association for Law and Governance had a gala to raise money for local law enforcement officers injured in the line of duty. During the gala, the association donated a total of $1 million to various local organizations benevolence funds to distribute to officers in need of help with injury-related medical costs.
How would each of these activities be classified?
As you can see, the various functions can provide a significant amount of valuable information when properly used. Additionally, when presenting a functional expense statement or schedule, it is important to break out program activities in a way that makes sense and does not overwhelm. In the next blog, we will discuss how to go about identifying and breaking out your nonprofit program activities.
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