Functional Expenses
Nonprofit expenses categorized by organizational function: program services, management, and fundraising.
Definition
Functional expenses are the classification of nonprofit costs into three categories: program services (mission delivery), management and general (administrative overhead), and fundraising (donor acquisition and cultivation). This classification is required for Form 990 and GAAP financial statements.
Why It Matters
Donors and regulators use functional expense ratios to evaluate nonprofit efficiency. A high program expense ratio (80%+) signals that most funds go to mission delivery rather than overhead.
Examples
Program expense
Cost of educational supplies for a tutoring program is classified as a program service expense.
Shared cost allocation
Office rent is allocated 60% to programs, 25% to management, and 15% to fundraising based on space usage.
How Nexus AP Helps
Nexus AP tags each invoice with functional expense categories and supports allocation rules for shared costs, simplifying Form 990 and financial statement preparation.
Start Free TrialFrequently Asked Questions
What is a good program expense ratio?
Most watchdog organizations recommend 75%+ of expenses go to program services. 80%+ is considered excellent.
How do you allocate shared costs across functions?
Common methods include square footage for rent, headcount for benefits, or time studies for shared staff. The method must be reasonable and consistently applied.
Category
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