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The Importance of Functional Expense Presentation to Your Organization

by Paul O Grady
February 22, 2012

Why is the presentation of Functional Expenses so important to your organization? Well, if you are one of the thousands of non-profit organizations that rely on grants as a major source of fundraising and any organization that seeks large gifts from savvy donors, you should already know how important the presentation of your functional expenses can be to these users of your financial statements.

The presentation or breakdown between your Program Services and Supporting Services (General and Administrative as well as Fundraising) costs is typically a major determinant when foundations are evaluating grant requests and making decisions about which organizations they will award grants to. For similar reasons, savvy donors will evaluate the organization's overall breakdown between program expenses and those that serve as supporting services before making large gifts.

Foundations awarding grants and donors making large gifts want to know how much of every dollar they award or donate will be used to support the program function of your organization. Therefore, it is critical that your organization have a defined and supportable functional expense allocation methodology that is consistent from year-to-year and that provides reliable and accurate results showcasing your organization in the most positive light when being evaluated by grantors and donors.

Now that you understand the importance of functional expense presentation and having an appropriate indirect expense allocation methodology, the next logical question should be "what indirect cost allocation methodology should I be using"? The answer varies by organization but often times revolves around the estimated "time" spent by upper management in the various functional expense areas as well as estimated square footage usage by various program and supporting service functions when allocating plant / facility related indirect costs.

After you've ensured an appropriate and supportable indirect cost allocation methodology, you should always benchmark your organization's results against those of your peers or similar type organizations to ensure consistency and/or to highlight if an improvement is needed in the overall functional expense breakdown of your organization.

Many have always considered the indirect functional expense allocation a simple, almost to be ignored, year-end closing entry that is really just for financial statement presentation at year-end when in fact it could mean much, much more to an organization's bottom line. So, don't ignore this important financial reporting issue and the impact it can have your organization's ability to receive grants and larger gifts from donors.

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