Top Tips for Allocating Expenses for Nonprofit Grants and Programs

Does allocating expenses across grants and programs frustrate you because of complexity and lack of automation? It’s a common nonprofit pain point.

For nonprofits, it’s critical wages and expenses are appropriately allocated both for compliance purposes and management’s understanding of program performance. The allocation process is often manual and time-consuming.

Review some helpful tips for making the allocation process smoother.

Adopt a cost allocation plan

Develop a cost allocation plan with a high-level framework of which costs need to be allocated and document the allocation approach and methodology. These plans should be reviewed annually. Having a written allocation plan helps provide month-over-month consistency and supports the rationale for monthly allocations.

Determine which costs to allocate

Below are some examples of how to consider costs to determine if and how they should be allocated:

• Direct costs can be easily identified and connected to a program or grant. Examples include staff who work 100% within that program or supplies exclusively used by a specific program or grant.
• Indirect costs are needed to support the program and grant activities but may be shared across the organization. Examples include staff who supervise program staff, training, travel, and supplies benefiting multiple programs.
• Overhead costs are costs supporting the organization as a whole, such as occupancy expenses and administrative costs. A determination should be made if a portion of these can also be allocated to programs or grant, if allowable.

Determine allocation basis

After reviewing which costs will be allocated, determine your allocation basis. Different approaches may be appropriate in different situations. For instance, employees who work across programs may be allocated based on time spent in each program as documented on their timecards.

Employee benefits may be allocated based on the number of full-time employees (FTEs) working in each program. Occupancy costs could be allocated based on the amount of square footage each program utilizes. The goal is to have consistent, logical, and documented basis for the allocation.

Implement the allocation plan

Implementing your plan is often driven by your organization’s software capabilities and how frequently allocation percentages among the programs may change.

Allocation methodologies may include:

• Transactional allocations — This is coding the expense directly to the appropriate cost center(s) at time of entry. This is most appropriate for direct program costs and allocations known and estimable from the beginning of the year, such as business software across departments. Some general ledger and spend management systems can automate this functionality.
• Payroll allocations — Salary and tax expenses can often be allocated through your payroll provider or system. Assign staff to specific locations, departments, and programs within the payroll system, which will generally allow for proper allocation of wages and taxes. If your employees track time against grants, consider integrating grant tracking into payroll for more detailed allocations. Work with the payroll provider to develop a general ledger export or system integration for ease of entry into your financial management system.
• Dynamic allocations — These are for indirect and overhead costs whose basis may change periodically, such as actual monthly general and administrative costs to be spread across programs, or health benefits to be allocated by FTE. Ideally, these allocations are done monthly, calculating the percentage basis, such as FTEs by program percentages, and then applying these same percentages to health care expenses. Many modern financial management systems can automate this process.

How we can help

If you’re frustrated with your current allocations — or lack thereof — we can help. Our team of professionals can help take the headache out of your allocations through our consulting and outsourcing services.

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