The number of nonprofit organizations in the U.S. with an annual revenue of over $1 Million has increased dramatically over the last decade. During high growth times, organizations must dedicate time to their reporting needs; as revenues increase, so do expenses. To maintain accurate and relevant financial reporting, organizations need to properly organize expenses, analyze their chart of accounts, and have proper processes in place to adequately allocate expenses. Below are suggestions of what to do when your organization is facing significant growth.
Don’t neglect to properly categorize/organize expenses
All money coming in and going out of your organization must be assigned to an appropriate category. An example of a category would be QuickBooks classes. This is particularly important if you accept donations or have grants that may be restricted for certain programs or uses.
To be successful at this, you need to properly analyze your current chart of accounts and take time to remove any redundant accounts and slim them down, if necessary. Also, take into consideration the functional expense reporting you are already performing for the Form 990. Condensed line items on the form 990 would include office expenses, travel, occupancy, and advertising. There is likely an efficient way to group some of the natural classifications to reduce the number of lines and prevent additional work when preparing for your financial statements.
Utilize functionality within your accounting system
For reoccurring expenses, determine the most appropriate allocation method, calculate the allocation percentages at the beginning of the year, and set-up your accounting software to automatically allocate the expenses on a per-invoice basis. An example could be insurance invoices. If your organization has low turnover, the allocation by personnel by program can be easily calculated at the beginning of the year. An automated allocation can then be performed each month for certain expenses.
For program tracking, it is best to utilize classes to properly track expenses for each grant or restricted contribution within it. By utilizing classes for each grant or restricted donation, the organization can more efficiently track that expenses are being spent for the right purpose/restriction.
Review methods on an annual basis
Like other policies, it is a best practice to review the organization’s allocation methods, at least annually, to ensure the method used accurately reflects how the costs are benefiting each functional classification. A study done by the Center on Philanthropy at Indiana University of over 220,000 nonprofit organizations found that more than one-third of organizations reported no fundraising costs at all, while one in eight reported no management or general expenses. The study concluded that 75% to 85% of these nonprofit organizations were improperly allocating their expenses. This can lead to missed opportunities for additional grants the organization could receive based on the misclassified programming/management and general expenses. In addition, donors like to see that funds contributed to the organization are being best served for the organization’s specific purposes.
While high growth within a nonprofit organization can be exciting, the organization must take time to implement ways to appropriately classify and record expenses based on their specific grants and donations that they receive. At TDT, we understand it can be difficult to implement proper procedures to organize and track expenses, especially during high growth times. If you need assistance, please feel free to reach out, and we would be happy to help assist you.