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What are functional expenses?

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There are two ways of categorizing expenses:  natural classification and functional classification.  
Natural expenses are line items that show how money was spent:  salaries, printing, rent, depreciation, etc.  Functional expenses group expenses according to their purpose - why the money was spent.  The Cultural Data Profile uses three basic functional expense categories: Program, Fundraising, and General & Administrative.  These categories appear on the IRS Form 990 (the federal information return for tax-exempt organizations), are mandated by accounting rules, and are a required part of all audits and financial reviews conducted by independent public accounting firms. 
Reporting expenses according to function will give you more insight into your organization’s work.  Because these groupings link all costs directly to their purposes, it also provides your funders and other stakeholders -- including staff and donors -- a clearer and more accurate snapshot of how your organization’s money is spent.  Functional categories can also illustrate expense trends over time, and help to evaluate how your organization’s expenses relate to its accomplishments.  
Program expenses are costs directly related to advancing the mission of your organization.  Examples include rent paid for a performance or exhibition space, production supplies, and salaries paid to personnel such as your artistic director, program managers, etc.
Fundraising expenses are costs related to seeking contributions and grants from individuals, foundations, government agencies and others.  These can include grantwriter fees, membership benefit costs, special event expenses, and printing and mailing of solicitation materials. 
General & Administrative expenses are costs incurred to keep your organization running. Sometimes referred to as “Management and General” costs, these can include all or a portion of accounting, insurance, supplies, utilities, etc.  Fundraising and General & Administrative expenses are considered “supporting expenses,” according to accounting rules, since the two together cover all expenses that are not directly related to program services. 
For information about how to enter your expenses, please see these articles:



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