Charitable organizations have an obligation to devote their resources to the charitable purposes for which they were granted tax exemption, and to spend donated funds on the programs and activities for which the funds were contributed. At the same time, the successful operation of any business or organization—including the responsible pursuit of nearly any kind of charitable purpose—requires effective management and administration. Administrative activities include financial and investment management, personnel services, recordkeeping, soliciting and managing contracts, legal services, and supporting the governing body of the organization. Not only do these elements ensure that the organization complies with all legal requirements, but they also help provide complete, accurate, and timely information to donors, the public, and government regulators.

• A major part of the budget should be allocated to programs. (Some “watchdog” organizations recommend that public charities spend at least 65 percent of their total expenses on program activities. However, this may not be applicable to all charities.)
• Adequate resources should also be allocated to fundraising and administration. 
• Programmatic, fundraising, and administrative expenses should be accurately tracked and recorded. 
• All costs, including staff time and overhead, should be included when assessing the cost of programs and services.

Both private foundations and public charities are permitted to incur reasonable and necessary
“administrative expenses” to further their charitable missions. Congress has never placed a general limitation on the amount of administrative expenses public charities can incur. Public charities that are required to file Form 990 must disclose their total expenditures for  administration or what the instructions to the form calls “management and general” expenses. The IRS defines management and general expenses as the organization’s expenses for overall function and management, rather than for its direct conduct of fundraising activities or program services. Overall management usually includes the salaries and expenses of the chief officer of the organization and that officer’s staff. If part of a manager’s time is spent directly supervising program services and fundraising activities, the appropriate portion of his or her salary and expenses should be allocated to those functions.¹

Rental income expenses and program-related income expenses are not included in  management and general expenses. Administrative expenses are further distinguished from “indirect expenses” such as rent, reception services, etc. which can be allocated to various program cost centers and to management and general. There is no comparable definition of administrative expenses for private foundations in the instructions to the Form 990-PF. Private foundations are permitted to count all “reasonable and necessary” administrative expenses against their five percent payout requirement.² Federal law does not permit expenses for ongoing investment management, such as investment consultant fees, custodial fees, attending investment conferences, etc., to be counted as qualifying distributions.

1. A sound budget balances revenue and expenditures;“balancing” also includes allocating the appropriate ratio of program, administration, and fundraising expenses against revenue. Have we discussed and established guidelines for this type of balanced budget?
2. It is the board’s responsibility to ensure sufficient infrastructure to fulfill organizational mission.What methods have we implemented to periodically assess how well we are meeting this responsibility? 
3. IRS Form 990 dissects fundraising expenses and revenue in detail. Do we have adequate information and accurate records to complete our Form 990?

19 Review of Mission and Goals

22 Annual Budget, Financial Performance, and Investments

32 Fundraiser Compensation