Ever heard the cliché “comparing an apple to an orange”? I’m not a scientist and I don’t know the cellular differences of both, but I do know that oranges are acidic with a thick peel usually removed prior to consumption. Apple, on the other hand, is a brand of electronics most commonly seen in the form of a contraption on people’s hips to text, make calls and take pictures. Ok – just kidding – in this statement the apple I’m referring to is a fruit and this is a statement that has been used for centuries to point out that two items, although in the same category, are not always comparable.
So, where am I going with this? Someone, somewhere at some point analyzed a not-for-profit’s statement of functional expenses and related the amount of expenses in the program column to the amount “spent on the mission of the organization”. It has now become an unfortunate misconception that all other expenses are “wasteful” or “irresponsible” resulting in organizations feeling pressured to keep their program expenses high and management and general and fundraising low. “What percent of total expenses should a not-for-profit spend on their program?” is perhaps the most frustrating question I hear.
In my opinion, it is unreasonable to set a standard percent of program expenses organizations should meet to assess if they’re spending their funds towards their mission. There are innumerable charitable entities, each with unique revenue streams, cost structures, and personnel. Some charge program fees for the services they provide whereas others rely solely on donations. Some are heavily reliant on volunteers while others have employees to run the program. I know a few that don’t even have employees! These are things that directly affect the allocation of expenses.
You might be wondering how do the aforementioned examples affect the percent of program expenses? Well, if an organization doesn’t charge for services, they must have a higher focus on fundraising efforts to support their mission. Therefore, they’d have higher fundraising expenses than an organization that charged fees. A higher percent of fundraising expenses means you’d have a lower percent of program expenses. If a charity can rely heavily on volunteers, they don’t have to hire as many employees to run the program. Free labor is great! However, how would this organization compare to one that has fewer volunteers and more employees? It would appear to have a lower percent of program expenses due to the other having more for the salaries paid.
These are just two of the many factors that affect the allocation of expenses of a charity. I encourage you to look beyond the financial statements (which is not something you hear often from an auditor) and assess each not-for-profit separately. It’ll be much easier than trying to compare an apple to an orange.
By Samantha E. Mahlen, CPA