Nonprofits face a unique set of challenges when it comes to managing expenses and allocating funds. Accuracy is paramount, as is its consistency. Eyes are everywhere and scrutinizing every dollar. Communities are eager to see results. The pressure to spend builds from multiple directions. And for some, budgetary or technology limitations provide additional barriers to implementing an efficient tracking process.
This first entry of our three-part series dives into the best practices your peers employ to improve their expense and funding management processes.
- Document your functional allocation plan in writing
It is essential that the methodology for allocating expenses be easily communicated. Not only to your organization’s staff, but to its governance board, independent auditors, and users of the financial statements. When your plan is documented in writing, it makes it significantly simpler to explain.
- Be consistent with your functional and cost allocation plan
The mere presence of a plan provides a foothold for enforcing it. Attempts may be made to step out of its stated flow. Updates may be needed due to growth. In both situations, the plan serves as a point of process truth. Exceptions to the plan should be minimal to maintain consistency and adoption.
- Identify expense transactions directly allocated to one (or multiple) functional categories
Accurate cost allocation between programs can be important for grant reporting purposes and determine the overall success of a particular program. Identify then document the type of expense transactions directly (or indirectly) allocated to each program service or offering.
- Establish your chart of accounts
Doing so helps the organization efficiently facilitate its allocation process within your accounting system and without burdening management at year-end.
- Maintain timesheets for those who handle tasks across multiple functional categories/programs
Timesheets should approximate the hours spent by individuals on program type, administrative, and fundraising services over a given week or month. Equally important is the need for those who maintain timesheets to understand the functional categories’ definitions and the difference in programs.
- Allocate by square footage instead
In some situations, time allocation isn’t practicable. This is often the case with rent, utilities, and other space-related costs. Therefore, allocating by square-footage is an acceptable alternative.
- Review your allocation methodology at least quarterly
It is not uncommon for funding streams to change or to see shifts in personnel and their responsibilities. Schedule time with the plan’s stakeholders to ensure your allocation process is still relevant.
Use the tips above to start a more streamlined, efficient, and reliable reporting effort. In our next post of the series, we’ll look at some of the specific challenges nonprofits confront in their expense management workflows.