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The Complete Guide to Functional Expenses for Nonprofits

January 10, 2024

There are different principles in nonprofit accounting and surrounding function expenses. When handling your organization’s finances, it’s important to have a thorough understanding of all aspects of your organization’s income and expenses. To help you do this, we’ve created this complete guide to functional expenses for nonprofits and other nonprofit bookkeeping and accounting resources.

Functional expenses in your organization are reported by their functional classification and recorded in your Statement of Functional Expenses (SFE). Your SFE is one of the four main statements you’ll utilize in your nonprofit, which also includes your Statement of Activities.

With accountability being one of the most important aspects of running your nonprofit, here’s how you can keep a detail-oriented approach to your functional expenses:

What is a Nonprofit Statement of Functional Expenses?

Your nonprofit’s SFE is a table or matrix report that covers your nonprofit organization’s expenditures into categories based on what the money was used to accomplish or the purpose it was spent. A statement of functional expenses is unique to nonprofits and does not have a parallel report from traditional businesses.

An SFE report tends to be a comprehensive report of your expenditures that may include things such as:

  • Salaries and Wages
  • Rent and Utilities
  • Insurance
  • Fundraising
  • Travel Expense
  • Postage

Each expense is associated with a specific purpose or project like Program Expenses, Administration, and Fundraising along with the totals for each and overall. The two inputs in your report are commonly referred to as Functional Expenses and Natural expenses. 

What Are Functional Expenses in Your Statement of Functional Expenses?

As we mentioned above, functional expenses are categorized as Program Expenses, Administrative Expenses, and Fundraising Expenses. 

Most state and federal documents that you will need to file to maintain your 501(c)(3) status will ask that you categorize expenses by function rather than nature. This provides transparency and shows how much of your funding is used on your mission-related activities vs. how much is used for the organization. 

Why Do You Need a Statement of Functional Expenses?

Like most of the financial statements and reports your organization will need to maintain, a Statement of Functional Expenses is meant to provide insights into your organization’s financial health and allow you to make decisions based on the data provided. 

More specifically, your organization’s SFE plays an important role in the development of your nonprofit’s annual operating budget. It will also provide you with an easy reference guide for filling out your nonprofit’s annual tax return at the end of your nonprofit’s fiscal year.

For example, the full form 990 includes a statement of functional expenses while forms 990-N, 990-EZ, and 990-PF benefit from having a functional expense report on hand as they require portions or abbreviated versions of your SFE.

As mentioned above, your Statement of Functional Expenses is also used for providing transparency which can help with providing a clear picture for your donors and stakeholders in your organization. This transparency can improve your donor’s trust in the organization, allowing you to build a stronger relationship.

If putting together your nonprofit’s statement of functional expenses – and other related financial documents – is overwhelming or intimidating, book a call to see how ModVentures can help you in your mission today.

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