Nonprofit accounting is unique in many ways – one being that nonprofits must track and report their expenses by three functional areas: program services, general and administrative, and fundraising. Many nonprofits struggle with defining their fundraising costs as they are often continuously working in the pursuit of obtaining contributions. To help nonprofits decipher what constitutes fundraising, it’s best to review how most governing bodies define costs incurred for the purpose of raising funds.
In the United States, the Financial Accounting Standards Board (FASB) defines fundraising costs as being those costs incurred for “publicizing and conducting fundraising campaigns; maintaining donor mailing lists; conducting special fundraising events; preparing and distributing fundraising manuals, instructions, and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others”. In other words, fundraising costs are those expenses incurred to generate income.
A nonprofit will incur some expenses that are easily classifiable and reportable as fundraising expenses. Such costs include the salary and benefits for fundraising staff. However, some costs will benefit more than one functional area and thus will need to be allocated to the appropriate areas based on a percentage. For example, the organization’s executive director may spend 70% time overseeing program activities, 20% time on general and administrative functions, and 10% time in fundraising. When this happens, the salary and benefits for the executive director will be allocated based on the time spent working on each applicable functional area.
Because most nonprofits would prefer to report the highest percentage of spending on program services, nonprofits should closely analyze costs to ensure they are not over-reporting fundraising expenses. For example, costs incurred by the organization’s accounting department on recording the contributions obtained from a fundraising event should not be classified as fundraising but as general and administrative. Likewise, nonprofits typically do not classify development costs (i.e., costs associated with building relationships with current and potential donors) as fundraising expenses but instead as general and administrative costs.