How to understand and separate nonprofit expenses

How to understand and separate nonprofit expenses

We previously made our case on the need for accuracy and transparency among nonprofits. While it’s tempting to make every expense on your balance sheet appear to be programmatic, it’s not realistic for a thriving nonprofit to exist without certain overhead costs. In fact, it may send red flags to the IRS and to potential donors when the books look too good to be true.

In our last blogpost, we offered a few tips on how to leverage the new nonprofit accounting rules to better tell your organization’s story to donors. We discussed rethinking how costs are categorized and being strategic in your allocation methods.  

For additional clarity, it also helps to understand the differences in key expense categories. Among them:

  • Program service expenses are the costs of goods and services directly tied to the organization’s mission.  
  • Fundraising expenses are the costs related to encouraging potential donors to give their time, money or services to the organization.
  • Membership development expenses often can be confused with fundraising expenses. The difference is that membership development expenses are, obviously, for organizations with memberships. They involve the costs of recruiting prospective members, securing membership dues and other benefits connected with membership.
  • Management and general expenses are all other costs not tied to specific programs, membership development or fundraising activities.

Investing the time to properly separate expenses could generate more grants for your nonprofit because it demonstrates financial transparency to prospective donors.

In many cases, we recommend nonprofits go a step further and get an audit. According to the Council of Nonprofits, publishing an independent audit report on your website or providing the report to those who request it are examples of transparent practices that donors have come to expect.

Often an audit is required in order to be eligible for funding. Charity watchdogs such as CharityWatch and Charity Navigator take into consideration whether a nonprofit has an annual independent audit. To be sure, an audit is not necessary or recommended for every nonprofit organization. In our upcoming blogposts, we’ll offer a few tips on how to tell if your organization should get an audit.

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