Use reporting rules to strategize and share your story with donors

Use reporting rules to strategize and share your story with donors

As a not-for-profit organization, transparency in your financial reporting not only gives donors an assurance of how their dollars are dispersed, but it also can help you make better strategic decisions.

To promote transparency, the Financial Accounting Standards Board has added clarity around reporting requirements for not-for-profit organizations in a 270-page update. Though the board’s update was released a few years ago, some of the requirements have only recently gone into effect, and many not-for-profits are unaware of how to navigate the changes.

We won’t go over every facet of the update, because the goal here is to simply give you some helpful information, without putting you to sleep. The board’s update included topics such as net asset classification, reporting financial performance measures, discrepancies in expense reporting, confusion around presenting cash flow information and classifying expenses by function and nature.

We’ll follow up from our previous blogpost and focus on this last one, functional expense reporting. Functional expenses now must be reported by their natural expense category, such as payroll or rent. This information now must be presented in a separate financial statement, a disclosure or on the face of the statement of activities.

Here are three points to consider in preparing your statement of functional expenses:

Rethink how management and general costs are allocated. One main concern not-for-profits have with the updated requirements is they now must classify costs for services like accounting and human resources as management and general expenditures. The concern is that some charity-rating services and watchdog groups will downgrade organizations when percentages for management and general expenditures are high.

However, it’s a good idea to have discussions with your staff to determine if some of their costs can be listed as a programmatic effort. For example, if your chief operating officer helps to develop strategy and spends time implementing a key program of your organization, that time can be classified as a programmatic effort. If a senior manager or human resource officer is involved in programmatic planning for the organization, that the cost could be listed under program services.

Be strategic about your allocation methodology. The updated rules require not-for-profit organizations to disclose their methodology or process for allocating expenses to program and supporting services. The methodology you use should be reasonable enough for someone to follow your calculations. You also can use different methodologies depending on the various expenses.  For example, you can use salaries to allocate programmatic overhead costs or the square footage of a building to allocate rent expenses. Though you are certainly welcomed to use timesheets to calculate salaries, you also could estimate an employee’s time and provide a note explaining the basis for the allocation. The main question you’re asking yourself is whether the person looking at your financial statement would find your methodology reasonable.

Tell a story in how you present your programs. The board’s update requires separating the major classes of program services in your financial statements. The programs you identify should reveal the mission or tell the story of the organization. If you have a charitable organization with a mission to provide college for foster children, then it’s likely that most of your expenses are grant-related and there are no other programmatic activities. However, if you operate a larger industry trade association, you may have several programs related to member services, such as conventions, advocacy, and publishing of a reoccurring newsletter. 

Soon you’ll be able to leverage the board’s rules in telling your story to donors, if you rethink how costs are categorized, be strategic in your allocation methods and focus on identifying the right programs. In our next blogpost on not-for-profits, we’ll dive deeper into understanding the differences between expenses for program services, fundraising, membership development and management.

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