One of the most common questions posed by donors is “what will my contribution be used for?” IRS form 990 and financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires expenses for charitable organizations to be reported under three categories: programming, general and administrative, and fundraising. One basic way to determine where the organization spent each dollar received is to divide the total of each of these categories into the sum of all expenses. This equation is commonly referred to as the efficiency factor of a charitable organization.
Donors can find these expense categories and totals on the Statement of Functional Expenses on IRS form 990. In addition, these totals can also be found on the statement of activities for organizations with financial statements prepared in accordance with U.S. GAAP.
As an example, a charitable organization with $760,000 in total programming expenses, $102,000 in general and administration expenses and $97,000 in fundraising expenses with total expenses for the year of $959,000 would have spent 79% on programming, 11% on general and administrative, and 10% on fundraising activities. As a result, the organization would have an efficiency factor of 79%. Another way to put this is that the organization spends approximately $0.79 of every dollar spent on programming.
High efficiency factors can be powerful development and marketing tools. One key to maximizing your efficiency factor is evaluating the method you use to allocate indirect costs to the three expense categories. Expenses that pertain solely to a specific category are directly allocated to that category. However, expenses that benefit two or more of these categories must be allocated using a reasonable and consistent methodology such as square footage, time studies or actual usage. Organizations should ensure the most appropriate method is being used to allocate indirect costs. In addition, the formula should be evaluated each year to ensure it has been updated for changes in the organization’s operating environment.