Understanding Nonprofit Program Accounting

Nonprofits often manage several programs at the same time. Each may have its own funding sources, expenses, restrictions, and reporting requirements. Nonprofit leaders need to understand the financials of each program. What does each major program cost? How is it funded? Is spending consistent with the budget and funding requirements? And what does the organization accomplish with that investment?

Program accounting provides the structure for doing that. It helps nonprofits track financial activity by individual program and meet financial reporting requirements. It also gives leadership better information about how resources are being used. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

What Is Nonprofit Program Accounting?

Program accounting is the process of tracking revenue and expenses by individual program or service area rather than looking only at organization-wide totals.

For example, a nonprofit that provides a housing assistance program, workforce development training, and youth counseling should track the financial activity for each program separately. That allows leadership to see how much each program costs and trace the funding sources back to the budget.

Nonprofits also classify expenses by function. These generally fall into three categories:

• Program services are activities that directly further the organization’s mission.
• Management and general expenses support the organization as a whole.
• Fundraising expenses relate to soliciting contributions.

Some direct program expenses are fairly straightforward. Shared expenses like the salary of an administrator who touches multiple programs may be more complicated. That salary may support a program directly, support the organization generally, or be divided among several functions depending on how the resource is used.

For financial reporting purposes, under FASB Topic 958, nonprofits are required to present an analysis of expenses by both nature, such as salaries or rent, and function, such as program services, management and general, or fundraising. Form 990 also requires certain nonprofits to report expenses across those categories. Auditors and other stakeholders routinely review this information. 

How to Set Up Program Accounting

Effective program accounting is a multistep endeavor. Accounting software can simplify the process and reduce the manual work required to produce program-level reports. Nonprofits first need to determine what programs to track, and then they can build and refine an accounting structure to successfully capture that information. 

Identify Programs and Reporting Needs — What does leadership need to see in financial reports? Start by identifying the programs and supporting functions the organization needs to track. Each program, for example, should include revenue and expenses, budget-to-actual variances, available grant or restricted funding, and other measures that help leadership understand how resources are being used.

The program expense ratio, which shows how much of the nonprofit’s total spending goes toward mission-related programs, may be of particular importance. It is calculated by dividing program expenses by total expenses. Donors, grantmakers, boards, and charity-rating organizations may use the ratio to understand how the organization allocates its resources. 

Set Up the Accounting Structure — Once the programs are defined, configure the accounting system so activity can be tracked at the appropriate level. Organizations with multiple grants or restricted funding sources may also need to track activity by grant, fund, or funding source. The goal is to make program-level reporting part of routine processes rather than something staff have to recreate manually.

Establish Coding for Direct Costs — Next, determine how expenses should be assigned when transactions are entered. Direct costs that clearly relate to one program should be coded to that program. Examples include compensation for employees who work exclusively on a particular program or supplies used only for that program. Clear coding rules for staff members can reduce errors and prevent necessary rework in the future.

Develop a Method for Allocating Shared Costs — Some expenses benefit more than one program and cannot be assigned directly. These are called indirect costs, or overhead costs. Areas like rent, technology, insurance, utilities, and administrative staff are common examples. Nonprofits should establish a reasonable method for allocating those expenses. Administrative salaries, for example, may be allocated based on time spent on different activities. Other costs may be allocated using another appropriate basis. The specific method will depend on the organization and the expense. What matters is that the methodology is reasonable, documented, and applied consistently across programs. 

Build in Grant and Restricted-Fund Tracking — Program accounting also needs to work alongside grant and donor restriction tracking. A program may be supported by several funding sources, and some of those funds may come with restrictions. The accounting system should make it possible to identify both the program expenses and the funding source associated with it. That helps the organization monitor available balances and demonstrate that restricted resources were used as intended.

Train Staff and Establish Review Procedures — Program accounting depends on consistent information. Staff who enter transactions should be very familiar with the coding system. New staff members must be trained accordingly. Organizations should also establish regular review procedures as part of their internal controls. Finance staff may need to work with program leaders to confirm that transactions and allocations are assigned appropriately.

Measuring Program Performance and Impact

Once program accounting is in place, nonprofits can use the information across the organization. One of the most important uses is understanding the true cost of delivering a program. Direct expenses may be easy to see, but the full cost also includes being able to see the share of personnel, facilities, technology, and other indirect resources that support program delivery. That information can improve budgeting and funding decisions. 

Program-level reporting can also help leadership compare actual spending with budgets and evaluate future funding needs. This information makes it easier to see where a program stands. Without clear reporting, it’s challenging to show the board that the program has the funding to expand or that additional fundraising is needed to sustain current activity levels.

Contact Us

Program accounting gives nonprofits better visibility into how resources are being used across the organization. It also provides the underlying information needed for financial reporting, budgeting, grant management, and program oversight. If you have questions about the information outlined above or need assistance with your next audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.