Remodeling Your Financials—how much did we spend on that?
Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
While we were away on vacation, I watched an out-of-town morning show. Guess what was on? Home remodeling! I love it when our favorite TV remodelers show their customers how to transform their house from an outdated property into the perfect dream home.
They usually propose to knock down a wall, open up the kitchen and sometimes even add a fire pit, letting the homeowners choose which features they want based on how much each feature costs. Knowing how much you’re spending on the fire pit vs. the kitchen island can be very useful in prioritizing and making choices about how to spend your limited budget.
The new nonprofit financial reporting standard includes a breakdown like this. Under the new standard, you must report expenses by function as well as by natural classification. If you haven’t been required to do a statement of functional expenses in the past, you’ll be remodeling your financial statements to add one now.
The statement breaks down your expenses into categories for programs, management and general and fundraising. Program costs relate to delivering your mission like program salaries and program supplies. Management and general expenses are those costs associated with running your entity such as board expenses and administrative support.
Charge costs directly to these categories whenever possible, but some costs relate to several areas at once. These are indirect costs like rent, depreciation, IT and your CEO. You’ll need to allocate these between the activities they benefit using a reasonable, unified method.
The new standard does add some specifications to this remodeling project. There’s new guidance about certain support costs including the costs of the accounting function, payroll processing, grant billing, grant financial reporting, budgeting, planning, benefits management and human resources management. These must be direct charged to the management and general expense category.
What can we learn?
Seeing what you spend on your various programs and activities is good for oversight and decision-making. Let’s say, you hold an event that your staff plans and conducts. You won’t really see the whole event cost just by looking at the hotel bill. You also need to see the cost of the staff time that went into that event. If you charge the salaries and allocate related overhead to your activities, you’ll see what you’re really spending. You might decide to raise the ticket price for that event or direct staff resources elsewhere.
If functional expense reporting is new to your nonprofit, be sure you have set up cost centers in your accounting software to segregate costs by function.
Now is a good time to identify your indirect costs. Make sure you are direct charging costs whenever possible, and not including costs in your indirect category that should be direct charged to management and general.
If functional expense reporting is new to your nonprofit, decide how you’ll allocate indirect costs to departments. Will you base it on level of effort or possibly the square feet used for each activity?
The new accounting standard for nonprofit financial statements is Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities. Its accounting and disclosure changes include:
Restricted funds, board-designated funds, endowments, functional expense reporting, statement of cash flows, investment income and expenses, cash management policies and liquidity.
If you’re the accountant charged with implementing the new standard, consider joining us for a detailed look at our live one-day seminar on November 3, 2017 in Alexandria, VA, Financial Intensive Training on the New Financial Reporting GAAP—Remodel Your Financials—an in-depth look.
If you’re new to nonprofit finances, this is a great time for nonprofit managers and emerging leaders to become familiar with the new nonprofit financial statements right from the beginning. We’re including the basics in the Remodeling Your Financials session of our live 2-day seminar, Financial Leadership Training for Emerging Nonprofit Professionals.
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