In this video, Carl Thomas, a manager at CK, provides a clear overview of a Statement of Functional Expense. This is a key financial report for not-for-profit organizations. Learn how this statment breaks down expenses into three essential categories: program services, management and general and fund raising. Each of these categories reflects how an organization allocates its resources to fulfill its mission. Whether you’re a nonprofit leader or simply curious about nonprofit finances, this is an important foundational topic to understand.

Transcript

I’m Carl Thomas. I’m a manager at Cray Kaiser focusing on the assurance line of business. Not-for-profits have unique financial reporting requirements – a little bit different than your average for-profit organization and government, of course. And one of the unique financial statements that is produced is called a Statement of Functional Expense. Now, what this does is it breaks up expense by three main categories, which we call functions. Now, a function is – a good way to think about it is – what is the organization doing with the money? What is the activity? What is the action, correct? So, the three main categories are what we will call management and general. So, you can think of this as, you know, the chief financial officer, probably human relations, certain sort of back-office functions, if you will.

And then another category that is used is program. Now, program is really the deliverance of the service that the organization exists for.  So, for example, if it’s a childcare entity, it’s going to be the people taking care of the kids every day, in a simple sense. Now, the third category is fundraising. Now, this is pretty self-explanatory, I think, but at the end of the day, it’s money spent to, I guess, raise more money, right? So, for example, like gala might be a good example, where donors are coming and having a nice time, and there’s perhaps a silent auction – different things like that.

Not-for-profit organizations really do need to think pretty hard about this statement because it can have implications for donors, for granting, et cetera, and so forth. It’s really important to try to break down, at a detailed level, where the expenses are going. If an organization is showing a lot of management and general expense, what you may have is – you may have donors getting a little nervous, saying, “Oh, well, a lot of money is going to overhead,” is kind of what that’s saying in a financial sense. Donors typically want to see their money going to program. The organization needs overhead. It has overhead. It’s never going to get rid of the overhead. But to the extent that a lot of thought can go into this statement to reflect the true reality, the organization is going to be presenting themselves that much better to the public and to potential donors, grantors, and those types of stakeholders.

Well, thank you for tuning in today. If anything we’ve talked about is resonating with you or sounds like something you want to discuss further, please feel free to call the dedicated Cray Kaiser not-for-profit team. We’re always available. The number is listed on our website. You can ask for Carl or Amy to start, but anyone can point you in the right direction. Thank you.