Why nonprofits should report accurate fundraising expenses

Why nonprofits should report accurate fundraising expenses

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What you should know about reporting fundraising expenses (when NPOs should report; exceptions; effects of cutting corners).

There is often reluctance when it’s time to report fundraising expenses, and for various reasons. There’s no doubt that nonprofit organizations have a unique ability to attract donations from members of the public through fundraising activities. And fundraising isn’t just a time to socialize — it’s a vital function of every nonprofit. 

The contributions received from individual donors and businesses that are free from grant restrictions provide funding. These funds allow the nonprofit to cover administrative costs that are often not covered by grants; they also allow nonprofits to invest in new programs and build necessary reserves.

When considering donations and awards to a nonprofit, donors and those who grant will look at the nonprofits’ ability year over year. They want to see if the nonprofit: 1) was able to attract unrestricted donations and 2) reserved to maintain and expand it’s stated program objectives in the community. 

There isn’t anything that would make nonprofits want to avoid reporting fundraising expenses… is there? Why the reluctance? 

Accounting standards require that nonprofit organizations report expenses in three categories of activities: 1) program; 2) management and general; and 3) fundraising or membership development. Fundraising expenses include: 

  • Costs associated with conducting fundraising campaigns or special events

  • The collection and maintenance of donor mailing lists

  • All activities involved with inducing individuals, businesses, foundations, or government agencies to contribute cash, securities, services, materials, time, or other items of value.

The costs associated with these efforts should be reflected as fundraising expenses even when the donation does not meet the criteria for recording it as a contribution.

Two exceptions that are typically not reported as fundraising expense 

1. The cost of accounting for the contributions that result from a fundraising activity and the cost associated with an event that is considered a direct benefit to the donor such as food, drink, or participation in an activity such as a round of golf. 

2. The cost of accounting for the contributions is reported as management and general while the cost associated with the direct benefit to the donor is reported as a deduction from the proceeds of the event.

The NPOs pressure to report a high percentage of their total expenses, and detrimental results

Nonprofit organizations usually feel pressure to report a high percentage of their total expenses as program activities and report a low percentage of their total expenses as fundraising and management and general activities. The assumption is that this will result in donors being more willing to give to an organization that is perceived as spending more of its resources for public benefit, and less on perceived ‘overhead.’ 

While this is the accepted norm in most nonprofits, adherence to this way of thinking can result in some detrimental activities. Under-reporting of fundraising expenses and biased allocation of shared costs can result in reporting that does not provide the nonprofit or the donor with useful information.

From the nonprofit perspective:
The true cost of fundraising activities — if under-reported — could lead the nonprofit to continue with fundraising efforts that result in a depletion of resources (time and money) that is not justified given the return from those efforts.

From the donor perspective:
If the financial information does not reflect sufficient effort in the numbers to attract additional donor dollars for reserves and necessary operating costs, the donor could be reluctant to be a sole source for contributions.

Don’t cut corners; financial statements should reflect the proper nonprofit fundraising expenses 

When a nonprofit organization accurately reflects its fundraising expenses in its financial statements, it is conveying to donors and grantors that the organization is healthy and has the necessary resources to attract contributions to sustain and grow its mission.

Kendra Dockham, CPA
Principal
Smith Marion & Co.

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