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Accounting for Fundraising Expenses
Practically everyone has heard the saying, “It takes money to make money,” and that phrase also rings true when it comes to fundraising for your nonprofit. Whether your organization is promoting an event, printing brochures for an upcoming campaign, or paying staff workers, fundraising expenses are a necessity when trying to attract donors.
Another aspect of running a nonprofit is how to account for these fundraising expenses. Accounting for a nonprofit organization is tricky enough, but knowing how to categorize expenses can be confusing and intimidating if you are not familiar with the process.
The following guide will give you a brief introduction to fundraising expenses and explain how to account for them while bookkeeping for your nonprofit.
Learn how Aplos can save you time and simplify your fundraising efforts.
Definition
In the nonprofit world, fundraising expenses are typically referenced in two ways:
- As a general way of referring to any costs related to raising funds for a nonprofit
- As one of the three functional expense categories (the other two consisting of program expenses and administrative expenses)
For this article, we will be discussing it as it relates to functional expense classifications.
Examples of Fundraising Expenses
The following activities are examples of expenses that would be categorized under fundraising expenses when accounting for fundraising costs:
- Marketing and promotional materials
- Event costs (silent auctions, fun runs, telethons, etc.)
- Printing costs
- Meals
- Grant writing expenses
- Direct mail campaigns
- Online fundraising platform fees
- Travel expenditures related to fundraising
- Compensation for event workers
- Work staff training
- A portion of the Executive Director’s salary and benefits
How to Account for Fundraising Expenses
Now that you have a general idea of which tasks and activities are considered fundraising expenses, the next step for accounting purposes is to know how to record them on your Statement of Activities.
What Is a Statement of Activities?
In simple terms, this is a statement nonprofit organizations use to record revenues, expenses, and net assets after taking these factors into consideration. This financial report is also sometimes referred to as an Income Statement.
Where to Enter Each Fundraising Expense
Expenses related to fundraising are entered as a line item in the Expenses section of your Statement of Activities. See example below.
The Importance of the Statement of Functional Expenses
Why Prepare a Statement of Functional Expenses?
A statement of functional expenses is a financial report that categorizes expenses based on their purpose rather than their nature. For nonprofits, this means separating expenses into three primary categories:
- Program services
- Management and general
- Fundraising
The preparation of this statement serves several critical purposes:
1. Regulatory Compliance
The IRS requires nonprofits to report expenses by functional classification on Form 990. This includes detailed disclosure of fundraising expenses, which are scrutinized to ensure that organizations are using their resources appropriately. Accurate accounting for fundraising expenses helps demonstrate compliance with tax regulations and maintains your tax-exempt status.
2. Donor Transparency and Trust
Donors increasingly evaluate nonprofits based on their financial efficiency. When you properly account for fundraising expenses, you provide transparency that builds donor trust. This transparency allows supporters to see how much of their donation goes toward your mission versus the cost of raising funds.
3. Performance Measurement
The statement of functional expenses enables nonprofits to calculate key performance indicators such as:
- Fundraising efficiency ratio (fundraising expenses ÷ total contributions)
- Program expense ratio (program expenses ÷ total expenses)
These metrics help organizations assess their operational efficiency and make strategic decisions about resource allocation.
4. Board and Management Decision-Making
Accurate functional expense reporting provides board members and management with critical information to:
- Evaluate the cost-effectiveness of different fundraising strategies
- Identify areas where expenses can be reduced
- Make informed budgeting decisions for future fundraising initiatives
Best Practices for Accounting for Fundraising Expenses
1. Implement a Robust Expense Allocation System
Develop a consistent methodology for allocating shared costs across functional categories. For expenses that serve multiple purposes (such as salaries for staff who split time between programs and fundraising), create a reasonable allocation method based on time studies, square footage, or other appropriate measures.
2. Document Allocation Methodologies
Maintain detailed documentation of how you determine expense allocations. This documentation should include:
- The rationale behind allocation percentages
- Supporting evidence for time allocations
- Approval processes for allocation decisions
3. Be Consistent and Transparent
Apply allocation methodologies consistently from period to period. If changes to allocation methods are necessary, document the reasons for these changes and disclose them in financial statement notes.
4. Avoid Common Pitfalls
Some nonprofits mistakenly underreport fundraising expenses by:
- Classifying fundraising costs as program expenses
- Failing to allocate appropriate portions of shared expenses to fundraising
- Incorrectly categorizing special events costs
These practices can lead to regulatory issues and diminished donor trust. Always prioritize accuracy and transparency in your reporting.
Tools to Help With Nonprofit Expense Allocation
Whether you are an accountant or an employee of a nonprofit that has been tasked with tackling the bookkeeping, the mere mention of functional expenses, Statement of Activities, and other nonprofit jargon can make the whole process seem quite daunting.
Fortunately, there is fundraising software available that is specifically designed for the needs of nonprofit organizations. Easily handle tasks like:
- Fundraising campaigns
- Expense allocation
- Statement of Activities/Income Statement
- Donor management
- Email marketing
- Online donations
Navigating the Joint Cost Allocation Challenge
Joint activities that combine fundraising with program or management functions present unique accounting challenges. For example, a newsletter that both educates the public (program) and solicits donations (fundraising) requires careful allocation of costs.
According to accounting standards, joint costs can be allocated between functional categories if they meet all three of the following criteria:
- Purpose: The activity accomplishes a program or management function
- Audience: The audience is selected for reasons other than their potential to donate
- Content: The activity includes a call to action related to the program purpose
If these criteria aren't met, the entire cost must be classified as fundraising.
The Impact of Proper Fundraising Expense Accounting on Your Organization's Reputation
In today's data-driven philanthropic environment, watchdog organizations and charity rating services closely examine nonprofits' financial statements. Your fundraising expense ratio is often used as a key metric in these evaluations.
While there's no universal "correct" percentage for fundraising expenses, transparency in reporting these costs helps stakeholders understand your organization's unique circumstances and funding model. Different types of nonprofits and different fundraising methods naturally result in varying fundraising expense ratios.
Free Recorded Webinar: 5 Metrics to Understand Your Organization’s Financial Health
To make good decisions for a nonprofit organization, leaders and board members need accurate, up-to-date, and clear financial information. But they also need the ability to interpret and use this data to make informed decisions. During this webinar, you will learn how to:
- Examine and evaluate your assets and liabilities for overall value
- Understand your fund balances so you will know if you have the funds you need to operate
- Determine if your spending is healthy to plan for future large expenses
- Understand how much money to keep on hand to keep your doors open
- Evaluate the financial efficiency of your programs or campaigns
Frequently Asked Questions
What are considered fundraising expenses for nonprofits?
Fundraising expenses include marketing, event costs, printing, meals, grant writing, direct mail, online fundraising fees, travel, staff compensation, and training.
Where should you record fundraising expenses in your financial reports?
Enter fundraising expenses as a line item in the Expenses section of your Statement of Activities (Income Statement).
Why should you prepare a statement of functional expenses?
You should prepare it because the IRS requires functional expense reporting on Form 990, and it supports donor transparency and board decision-making.
When can you allocate joint costs between fundraising and program expenses?
You can allocate joint costs only if they meet Purpose, Audience, and Content criteria; otherwise classify the entire cost as fundraising.
How should you allocate expenses that serve multiple purposes?
Use a consistent allocation methodology (time studies, square footage), document the rationale and evidence, and apply it consistently period to period.
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