There’s a temptation among nonprofits to present all their expenses as a program service, or an expense directly related to the organization’s mission. We understand the pressure, but we encourage you to push for more transparency in your financial reporting. By doing so, you may attract more of the right donors who respect the expense of organizational growth.
Yes, there will always be donors critical of every dollar your nonprofit spends; they’ll want to see nearly every dollar categorized as a programmatic expense. Typically, donors with this mindset are uneducated about the complexities of operating a nonprofit.
Hiring the best fundraising talent or membership development expertise is an investment. If a nonprofit is sufficiently growing, it’s reasonable that its expenses also will grow. There’s a cost associated with managing the increased revenue. There are salaries and benefits to pay for grant writers, advertising costs for publicizing campaigns, possible software costs for maintaining donor lists, postage and printing costs — not to mention rent, telephone and utility payments. The list goes on.
Seasoned grantors with access to larger donations know how to look at these functional expenses and percentages to see if they are in line with industry norms; they’ll be leery of financial statements that appear too good to be true. In addition, misrepresenting your expenses could send red flags to the IRS, which is known for tracking extreme imbalances in percentages to pinpoint organizations to audit.
In our upcoming blogposts, we’ll break down a strategy for properly reporting those functional expenses in a way that astute financial statement readers can appreciate. You may also find that accurate reporting of functional expenses will help you make better strategic decisions about your organization’s future.
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