First Thoughts

Arts Finance. Building stronger nonprofits.

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Allocating expenses is by no means a necessity, unless of course, your organization is on the receiving end of funding that requires allocation. Federal funding is known for this requirement, as are other public sources of support. But regardless of whether or not your organization is mandated to allocate expenses, as a procedure, it does have its benefits.

But let’s back up for a moment. What is allocation, exactly? Allocation is simply the process by which an organization associates indirect expenses with implied impacted activities.

Expenses generally fall into one of two categories, direct and indirect. Direct expenses are clearly associated with a particular activity, or project. Indirect expenses can not be so easily associated. A printing bill for a specific collateral piece to be used by the fundraising department is an example of a direct expense. There’s no question which department should take responsibility for the expense.

On the other hand, it generally isn’t quite so easy to associate an electric bill with any specific activity or project. Utility bills are good examples of an indirect expense.

The challenge is determining how much of that electric bill (that indirect expense), should be charged to fundraising, and how much should be charged to administration, or marketing, or other program services.

The solution lies in distilling the relationships between your organization’s activities into sets of ratios, allowing you to routinely and consistently portion out indirect expenses to those various activities, or projects, on a percentage basis.

Next time I’ll cover some specific examples as to how this system might be constructed. In the meantime, a simple allocation methodology is outlined in the Sample Budget Worksheet, along with the accompanying notes. Take a look, and don’t hesitate to drop me a note if you have any questions.

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