What are functional expenses?
Most ledgers record natural expenses: salaries, rent, travel, supplies. These say what you bought.
Functional expenses sort the same costs by purpose. They answer a different question: what was the money used for?
Three groups are common:
| Group | What it covers | Example |
|---|---|---|
| Program services | Work that delivers the mission | A nutrition project’s staff, training and supplies |
| Management and general | Running the organisation | Finance, HR, governance, audit |
| Fundraising | Raising money | Proposal writing, donor events |
The same salary line can fall in all three groups, depending on what the person did.
Why do donors ask for them?
Donors, boards and regulators want to know how much of the money reaches the mission, and how much supports the organisation. A functional split gives them a simple view.
The split also helps you. It shows how fast support costs grow compared with program costs, and it supports talks about fair overhead rates. Names and rules for these groups vary by country and standard, so check what applies to you. Our article on allocating shared costs covers the split of joint costs.
How do you classify costs?
- Define the groups in a short policy, with examples.
- Classify direct costs as program when they serve one project’s work.
- Classify support costs such as finance and audit as management and general.
- Classify fundraising costs such as proposal development.
- Split mixed costs. A person who spends 70 percent of their time on a project and 30 percent on management is split on that basis.
- Use records. Timesheets and usage logs support your split.
- Review yearly. Check that definitions still fit.
What are the common mistakes?
- Calling every shared cost “program” to improve the ratio.
- Leaving shared costs unsplit, so one function takes all of them.
- Changing the method between years without a note.
- Using no records, so the split cannot be defended.
An auditor will test the basis you used. Consistency matters more than the exact method.
How should you present them?
A common format is a table with natural expenses in rows and the three functions in columns, with totals on both axes. Add a short note that explains the allocation basis. Keep last year’s figures beside this year’s, so readers can see the trend.
A worked example
An NGO has total expenses of 1,000,000. Salaries are 600,000, travel 150,000, rent 100,000, supplies 100,000 and audit 50,000.
Staff are split by time records. Program staff cost 420,000 and are charged to program services. Finance and HR staff cost 120,000, so the full amount goes to management and general. Fundraising staff cost 60,000 and go to fundraising.
Rent is split by headcount. Program staff are 70 percent of headcount, support staff 20 percent and fundraising staff 10 percent. The rent of 100,000 becomes 70,000 program, 20,000 management and general, and 10,000 fundraising. Travel is charged to the activity it served, mostly program. Audit is management and general.
The final table shows each cost type across the three functions, with totals. The NGO notes the bases used under the table, and keeps the working paper.
How to avoid distortion
- Do not decide the split to reach a target ratio.
- Keep the same definitions each year, and record any change with the reason.
- Make sure timesheets reflect real work. Standard percentages without records are weak.
- Review items that sit in management and general for a long time. Some may serve programs.
- Ask a colleague outside finance to challenge the split.
What to tell readers
Add a short note under the table. State the groups, the allocation bases and any change from last year. Readers trust a clear note more than a perfect ratio. Remember that different countries and standards use different names and rules for this report. Confirm what applies to you and what each donor expects.
How functional expenses differ from a budget view
A donor budget groups costs by budget line, such as staff or equipment. A functional view groups the same costs by purpose. Both views use the same underlying entries, so they must agree in total. Before you publish a functional table, check that its grand total equals total expenses in your ledger, and that no cost appears in two functions. Small differences usually point to a cost that was split twice or left out.
How to explain the result to your board
Boards often focus on one ratio. Help them read the whole picture instead. Show the trend over several years, explain any jump in support costs, and link the numbers to results. A rise in management costs may follow a new system, an audit or growth in the number of grants, and it may be sensible.
Where EMPOBase fits
In EMPOBase, financial statements use your chart-of-accounts classifications, including functional expenses. You choose the classification for each account, and Cost Allocation helps you split shared costs through journals. Review the classifications and entries before you rely on a statement. The ledger is not statutory accounting, so your accountant decides what your legal reports need. See the platform overview.