Statement of Functional Expenses Template for Nonprofits

Usually financial statements refer to the balance sheet, income statement, statement of cash flows, statement of retained earnings, and statement of stockholders’ equity. Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses. As a fractional CFO, he goes beyond routine duties, guiding organizations with strategic insights for sound financial decisions. Velu’s statement of functional expenses services address the unique challenges faced by nonprofits and small businesses, fostering sustainable growth.

Definition and Purpose

All nonprofit organizations in the US are now required to report their expenses based on their functional classification and by the natural classification, as per Financial Accounting Standards Board guidelines. If your nonprofit records expenditures based on natural categories, why do you need to report on your functional expenses? First, most state and federal documents that your organization has to file to maintain its 501(c)(3) status ask that you categorize expenses by function rather than nature. Second, functional categories promote transparency by showing how much of your funding is spent on mission-related activities and how much is used to run the organization.

Management and General Expenses

Organizations undergoing an annual nonprofit audit must present expenses by functional areas in financial statements. Firstly, it offers transparency to donors, members, and regulators by explicitly demonstrating how the organization uses the funds. It helps leadership understand the full costs of each function, which aids in strategic decision-making and budgeting. At The Charity CFO, we work exclusively with nonprofit organizations to give them accurate books, timely reports, and expert advice on their nonprofit finances. Yet many nonprofits struggle to keep their books updated or create the financial statements they need on time.

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• Functional expenses are reported by their functional classification and recorded in a Statement of Functional Expenses.
• While donors expect to see most of a nonprofit’s expenditures allocated towards program services, they might question a very aggressive program services allocation.
• Form 990 is essentially a mirror of a nonprofit’s financial statements with additional disclosures.
• Since there are now two fields – the account and the class – there are twice as many things to get wrong.
• The number of accounts depends on the number of programs that the nonprofit has, the types of revenues it earns, and the level of detail required for planning and control of the organization.

With this categorization, stakeholders, including donors, board members, and even the general public, gain a clearer picture of the organization’s financial operations. They can discern how their funds or contributions influence and drive the different facets of the nonprofit. This section outlines some common pitfalls to avoid, particularly regarding overhead costs and the allocation of expenses. Understanding how to effectively read and analyze the Statement of Functional Expenses is crucial for anyone involved with nonprofit management, funding, or oversight. This section provides a step-by-step guide to navigating this statement, offers tips for identifying key information, and explains how to understand the allocation of costs across different functional categories.

Each category plays a critical role in the overall sustainability and success of the organization, and understanding these components is crucial for anyone involved in managing, funding, or evaluating nonprofit entities. Successful nonprofit organizations strive to keep the management and general expenses lower than other functions when possible. The classification of management and general is reserved for expenses that are related to the overall operations of the organization. Expenses commonly categorized as management and general include salaries, insurance, staff meetings, accounting and professional services, and other administrative expenses. Actively keeping track of functional expenses aids in preparing a statement of functional expenses, a requirement for an audit. Tracking functional expenses is also an excellent tool for decision-making and transparency.

If a not-for-profit’s SOFE is showing this isn’t the case, it’s a good starting point for a discussion on why this may be. Some expenses though might for something similar – say “Consulting Expense” which are used for two categories unearned revenue – say “Consulting Expense” for program – and “Consulting Expense” for management. Consider a consultant paid to work with a nonprofit’s clients versus an HR consultant for instance.

• Firstly, it offers transparency to donors, members, and regulators by explicitly demonstrating how the organization uses the funds.
• An organization must, at minimum, allocate expenses among program, management, and fundraising for purposes of the IRS 990 report and the organization’s audit (if applicable).
• In this blog, we will jump into the significance of the Statement of Functional Expenses and explore its components.
• The Statement of Functional Expenses that nonprofits issue is referred to as a matrix, because it requires organizations to report their expenses by both functional and natural classification.
• It can also provide internal benchmarks for financial performance over time or in comparison with similar organizations, which is crucial for strategic planning and improvements.

This statement actively provides insight into the effective use of resources to fulfill the organization’s mission. It also promotes analysis and discussion about the mission relevance of each activity in an organization’s program portfolio. These discussions can lead to renewed commitment for those program activities requiring subsidy and to exploration of different fundraising Accounting for Churches strategies to support them.