For nonprofit organizations, functional expenses refer to the various types of expenses that are associated with fulfilling the organization’s mission. These expenses are typically categorized into three main categories: program expenses, management / general expenses, and fundraising expenses. Functional expenses are a critical aspect of nonprofit financial management, as they allow the organization to track and report on how its resources are being utilized.
Program expenses are the costs associated with delivering the nonprofit’s core services or programs. This can include supplies and materials for program delivery, location of programs, and other direct expenses related to program operations. An area that is often forgotten about is the staffing costs to administer the program. Nonprofits can include both the full costs of direct staff, as well as partial costs of staff who only work on a program as a portion of their job, such as an Executive Director.
Program expenses include:
- Salaries and benefits for program staff
- Supplies and materials for program delivery
- Travel expenses for program-related activities
- Rent and utilities for program facilities
- Equipment and maintenance costs for program operations
Management and Administrative Expenses
Management and administrative expenses are the costs associated with the organization’s overall management and operations. This may include salaries and wages for administrative staff, rent, utilities, and other overhead expenses. Many nonprofits try to keep these expenses low, by properly allocating expenses to program when appropriate. This is helpful for grants or funders who have a maximum requirement for percentage of total expenses that are allocated to management/admin.
Management and general expenses include:
- Salaries and benefits for administrative staff
- Rent and utilities for office space
- IT and technology expenses
- Director and Liability insurance
- Office supplies and equipment
Fundraising expenses are the costs associated with raising money to support the organization’s mission, apart from activities that may be attributed to programs. This can include salaries and wages for fundraising staff, event costs, marketing and advertising expenses, and other expenses related to fundraising operations. Many funders will require that you include fundraising expenses within management/admin while calculating the total costs that are attributed to these functions. However, check each funder closely to make sure!
Fundraising expenses include:
- Salaries and benefits for fundraising staff
- Event costs for fundraising events
- Marketing and advertising expenses to promote fundraising campaigns
- Travel expenses for fundraising activities
- Professional fundraising consulting fees
Tracking functional expenses is not only required by many funders and donors, it is a good practice for your own internal controls. Once you better understand your expense categories, you can make high-level decisions regarding allocation of resources and priorities for funding. You may also be surprised by how high or low certain categories are and where you can make needed changes.