Types of nonprofit expenses you need to know

Tracking nonprofit spending is more important than it’s ever been. Just look at recent federal funding cuts and you’ll understand why:

• An Idaho food bank had $900,000 worth of food loads cancelled due to revoked USDA funds, rendering them unable to provide groceries to food insecure individuals 
• The Washington Trails Organization saw nearly $800,000 in trail maintenance contracts with the U.S. Forest Service frozen, which cost them volunteer services like clean bathrooms, trash pickup and human waste removal
• Refugee support organizations like Catholic Charities of Texas have been forced to close, leaving incoming refugees to find benefits, enroll in schools and find legal representation

Many nonprofit leaders and finance teams struggle with categorizing and controlling spending. 

Nearly ¾ of reporting nonprofits struggled to track where they spent funds and donations. Over ⅓ are missing out on real-time access to performance metrics. 25% of reporting nonprofits have less than 30 days of cash in reserves.

With funding cuts looming, it’s absolutely critical to track and categorize expenses for nonprofit organizations. This process enables them to understand funding, comply with regulations and maximize impact with the funds they have. Before getting started, it’s critical to know the types of nonprofit expenses and what they include. 

Understanding nonprofit expenses: The three main categories

Program expenses: Driving your mission effectively

Program expenses are the costs incurred to provide the services your nonprofit offers to fulfill its mission. If your non-profit provides free transportation for senior citizens, program costs might relate to finding and managing drivers, purchasing fuel, extending insurance coverage and software to manage drivers. The main types of program expenses include:

• Salaries and wages – payments to staff members who manage nonprofit programs
• Supplies – purchases of any materials needed to run programs
• Travel costs – funds allocated to employees for program-related travel
• Services – fees paid for services that support your programs

Program expenses are generally the easiest to justify because they fund all activities that benefit the receiving population. But it’s still necessary to optimize costs where possible. 

Ensure employee satisfaction. In order to consistently operate your nonprofit, you’ve got to keep staff happy so they’ll stick around. Paying them reasonable wages with good benefits is one way to do that. Making their jobs meaningful and streamlined is another. Evaluate software that will eliminate manual work and make their lives easier. And when in doubt, ask them for feedback. 

Negotiate discounts at every opportunity. If you buy school supplies in bulk, for example, look at different vendors and find out their rates. See if they will provide discounts for early payments. Enroll employees in travel reward programs – you can use those rewards for flights and hotels later. Always be on the lookout for discounts.

Administrative expenses: Managing your organization & optimizing costs

Administrative expenses are the fees your nonprofit pays to run its back office operations. They’re not visible to people outside the organization, but they’re absolutely critical to its function. These costs sometimes present a conflict with donors, who want to make sure funds go directly to affected parties.

Fees for administrative services can add up quickly and represent a large percentage of nonprofit spending. However, that doesn’t mean you shouldn’t incur administrative costs – you just need to be smart about them. 

Zero in on your nonprofit’s impact. Don’t focus too much on overhead expenses. Spend your energy demonstrating your nonprofit’s impact. The standard overhead ratio for nonprofits is 20%, but if your nonprofit is achieving its mission with 30%, why does the standard matter? Make it your personal mission to show donors and board members how your organization is succeeding in the community. 

Outsource infrequent tasks. Evaluate work that your organization is doing based on the level of frequency. If you’re only doing bookkeeping or accounting tasks once a month, that may be work to outsource. But if training for volunteers and employees is pretty continuous, keep it in-house.

Split administrative expenses when possible. Consider your local or regional connections to other nonprofits. Could you save money by sharing the costs for legal services, if your organizations are pretty similar? Or maybe you could get discounts on professional organization memberships if you pool staff for applications.  Sharing costs with other nonprofits can help reduce administrative fees.

Fundraising expenses: Soliciting donors with cost efficiency

Fundraising expenses are any costs incurred to solicit donations for your organization. If your nonprofit teaches English as a second language to immigrants, for example, you might solicit donations via phone calls, email campaigns and in-person parties. You might also provide gifts of thanks to donors for their donation. Fundraising expenses include:

1. Marketing & advertising for things like email service providers, social media ads, paper flyers and advertisements in relevant publications
2. Donor management which could include software that helps your nonprofit manage donors and individual fundraising campaigns
3. Event planning and rental fees for facilities, food, drink, silent auctions, etc. associated with in-person fundraising events
4. Fundraising consultants you hire specifically to manage and grow your donations
5. Thank-you gifts you give to donors after their donation

Costs can add up quickly when creating fundraising plans for your nonprofit. It’s critical to keep them as low as you can while still creating a robust fundraising strategy.

Find the lowest cost with the biggest impact. When you’re evaluating marketing and advertising activities, you’ll want to look at the options available combined with costs and effectiveness with your audience. Mailed letters may be more effective if your audience skews older, but they’re also very expensive. Text messaging or email is much more cost-effective and caters to a younger donor base. 

Leverage your board of directors and donor network. Your board of directors, combined with your donor network, can be a massive source of support in fundraising efforts. Board members might be able to get you a discounted event venue where they have a connection. Or maybe they can bring in a coveted speaker. Donors might be willing to offer free items for a silent auction. Whatever you need, don’t be shy to ask. 

Regularly evaluate costs to assess effectiveness. Let’s say you’ve selected all your options for this year’s fundraising efforts and were able to keep costs low. But next year, it’s a different story. Maybe that email provider or donor management software had a 25% price hike. It’s important to look around and gather pricing each time, so you’re not missing out on discounts for similar services.

Best practices for tracking nonprofit expenses

Map your organization’s goals to spending. Before you make a plan for tracking expenses, go back to your organization’s goals. Why does your nonprofit exist? What is the core work of the organization? The process of articulating these goals will help you determine what spending is acceptable and what’s not. 

Create a draft expense management policy. Equipped with your goals, you are prepared to start writing an expense policy. Which types of programs will you provide? What are the approved costs associated with those programs? What expenses are restricted or declined based on your nonprofit’s tax status (501c3, for example)? Ask yourself these questions about administrative and fundraising costs as well. With this info, you’ve got the skeleton for an expense management policy.

Build a mapping of expenses for tracking purposes. Take your draft expense policy and create a framework for internal tracking. If your nonprofit provides food rescue and distribution to underserved communities, food, labor and delivery costs may make up the bulk of your expenses. Establish categories for types of costs with approved and unapproved merchants. Make a list of GL codes with corresponding vendors and transactions. 

Keep immaculate records of expenses. For all expenses, require that employees and volunteers provide receipts for transactions. Offer them a centralized location to both store receipts and access expense management policies. Make sure they attach their receipts to the appropriate expense reports, and clear up any questions or inconsistencies about expense management policies quickly.

Maintain transparency with your board of directors. Take it one step further with expense policies and share spending patterns with your board of directors. Expenses can tell the story of your organization’s impact. If your organization provides free, non-emergency transport to children undergoing cancer treatment, you might use transaction data to calculate the number of trips funded per family or per city. You could leverage that data to assign trips to grant potential.

How PEX improves nonprofit expense tracking

The best practices mentioned above probably seem like they require a lot of manual effort. But with PEX’s expense management software, automation and AI take over the work. 

Employees can use PEX’s mobile app to snap pictures and upload images of receipts in one central location. AI-based receipt matching takes those receipts and matches them to card transactions. Pre-programmed GL codes show up automatically on expense reports. 

Custom spend rules allow nonprofits to ensure funds are used for mission-aligned activities and align financial tracking with IRS classifications. Automated approval workflows send approval requests directly to managers, rather than having finance staff forward spreadsheets for review. 

Virtual cards are a perfect fit for grant management, enabling nonprofits to track restricted funds accurately. Real-time expense tracking delivers enhanced financial oversight, preventing the misuse of funds, expense fraud and spending visibility for nonprofit boards. 

Learn how PEX can support your nonprofit’s expense tracking processes with efficiency, accuracy and visibility. Contact us for a customized demo.