How to Allocate Expenses by Program, Fundraising, and Administration
For nonprofits, accurate expense allocation is essential for understanding how funds are used and demonstrating accountability to donors and stakeholders. Allocating expenses by program, fundraising, and administration not only provides clarity but also ensures compliance with reporting requirements and helps maintain trust. Here’s how to do it effectively.
1. Understand Why Expense Allocation Matters
Allocating expenses accurately supports transparency and helps nonprofits make informed decisions.
Key Benefits:
Compliance: Meet donor, grantor, and IRS reporting requirements.
Insights: Understand the true cost of programs and fundraising efforts.
Trust: Demonstrate accountability and efficiency to stakeholders.
Pro Tip: Regularly review allocation methods to ensure they align with your organization’s goals and reporting needs.
2. Identify Direct vs. Indirect Costs
Categorize expenses to allocate them properly.
Direct Costs:
Expenses that are directly attributable to a specific program or activity (e.g., program materials, staff salaries for program-related work).
Indirect Costs:
Shared expenses that benefit multiple areas, such as rent, utilities, or administrative staff.
Pro Tip: Assign direct costs first, then allocate indirect costs based on a fair and consistent method.
3. Choose an Allocation Method for Indirect Costs
There are several methods for allocating shared expenses.
Common Methods:
Time Tracking: Allocate expenses based on staff hours spent on programs, fundraising, or administration.
Square Footage: Allocate rent or utilities based on the space used for each function.
Revenue: Distribute costs proportional to the revenue generated by each program or activity.
Pro Tip: Document the rationale behind your chosen method to support audits or donor inquiries.
4. Track and Document Staff Time
For many nonprofits, salaries and wages make up a significant portion of expenses.
How to Allocate Staff Costs:
Use time-tracking tools to record hours spent on programs, fundraising, and administrative tasks.
Calculate the percentage of time spent on each function and allocate payroll expenses accordingly.
Update allocations regularly to reflect changes in staff responsibilities.
Pro Tip: Implement training to ensure staff understand how and why to track their time.
5. Use Technology to Streamline Allocation
Accounting software can make expense allocation more efficient and accurate.
Recommended Tools:
QuickBooks Online: Set up classes or tags for programs, fundraising, and admin.
Sage Intacct: Advanced allocation features for complex organizations.
Time-Tracking Apps: Tools like Toggl or Harvest to track staff hours.
Pro Tip: Automate recurring allocations for consistent expenses like rent or insurance.
6. Regularly Review Allocations
Expense allocations should be reviewed to ensure they remain accurate and fair.
When to Review:
Quarterly or annually as part of financial reporting.
When launching new programs or ending existing ones.
During audits or donor reporting periods.
Pro Tip: Compare actual spending to budgeted allocations to identify any discrepancies.
7. Report Expenses Transparently
Donors and grantors often want to see how funds are used across programs, fundraising, and administration.
What to Include in Reports:
Total expenses by category (program, fundraising, admin).
Narrative explanations for allocation methods.
Visuals like pie charts to illustrate spending proportions.
Pro Tip: Highlight the efficiency of program spending to build donor confidence.
Final Thoughts
Allocating expenses by program, fundraising, and administration is more than a bookkeeping exercise—it’s a powerful tool for transparency and decision-making. By using consistent methods, leveraging technology, and providing clear reports, you’ll show stakeholders exactly how your organization maximizes its resources to fulfill its mission.
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