When financial discussions happen in the nonprofit world, the focus is usually on revenue generation or the common problem of “limited resources.” In one survey of nonprofit leaders, more than half of respondents cited their organizations’ financial health (and specifically the ability to bring in enough revenue) as their biggest concern going into 2025.

But while fundraising and pursuing other income sources (e.g., grants and investments) are essential for maximizing your nonprofit’s impact, knowing how you’re using your resources is just as important to your organization’s financial sustainability. 

In this guide, we’ll review the different types of expenses your nonprofit should be tracking in its bookkeeping system. But first, let’s dive deeper into why strategically allocating costs and continuously monitoring spending is so important for your organization.

Benefits of Nonprofit Expense Tracking

Generally speaking, tracking your nonprofit’s expenses lets you know exactly how your funding is supporting your mission at any given time. When you understand this information, you can more effectively:

  • Push major initiatives forward and do more with less as you launch programs, complete projects, and run campaigns.
  • Promote transparency with comprehensive and accurate financial statements, tax returns, grant reports, and other public-facing documents.
  • Comply with legal requirements by ensuring that all of your nonprofit’s funding is reinvested into the organization and that you honor donor-imposed restrictions on contributions.
  • Incorporate impact details into supporter appreciation messages, since you’ll have a better idea of what you can accomplish with gifts of different sizes (e.g., staff at a food bank would know how many meals $25, $50, or $100 could provide).

If your nonprofit is just getting started with expense tracking, you’ll probably use a spreadsheet for simplicity. However, once it’s within your budget to do so, you should invest in a dedicated accounting platform so it’s easier to organize your records, monitor new inflows and outflows of cash, and create and store reports all in one place.

Nonprofit Expense Categories to Track

The most effective way to organize your nonprofit’s costs is to use functional expense categorization. While this method is more nuanced than categorizing costs based on the nature of payments made (as most for-profit organizations do), it provides more insight into how your organization uses its resources in light of its mission. Let’s dive into the three categories of functional expenses in more detail.

Program Expenses

Program expenses encompass all spending that directly furthers your nonprofit’s mission, whether it’s part of a specific community program, a one-time project, or more general day-to-day efforts. Because this category is so mission-specific, the costs that fall under it vary widely from organization to organization.

To give you an idea of this variance, here are a few examples of costs that different types of nonprofits might include in their program expenses:

  • Animal shelter: Food, treats, toys, bedding, litter, and veterinary care for rescue pets
  • Art museum: Maintenance of permanent galleries, new exhibit design, restorations of individual pieces
  • Church kids’ ministry: Sunday School or children’s church curriculum, supplies for games and crafts, bottles and diapers for the nursery
  • Forest conservation group: Saplings and gardening tools for tree-planting events, environmental advocacy resources and software

Program expenses should make up the biggest chunk of your nonprofit’s budget. As Jitasa’s guide to nonprofit financial ratios explains, “Calculating your program efficiency ratio [by dividing your program expenses by your total expenses] allows your nonprofit to measure the amount that you spend on programming as compared to your total budgeted expenses. You might have heard 0.65 or 0.7 thrown out as optimal numbers, but as long as your ratio shows that the majority of your spending is program-related…you’re on the right track.”

Administrative Expenses

Any costs your nonprofit incurs that aren’t programmatic are referred to as overhead expenses. Nonprofit overhead has two components, and the first is administrative expenses. Also known as management and general costs, this category includes all of the spending that’s necessary to keep your organization running day to day, including:

  • Rent or mortgage payments on your nonprofit’s facility.
  • Utility bills (water, electricity, Wi-Fi, etc.)
  • Insurance of various types, from ongoing property coverage to special event liability protection.
  • Office equipment, which may include back-office software like your accounting platform in addition to desks, chairs, computers, and other tangible items.
  • Staff compensation—according to Astron Solutions, you should account for indirect compensation such as healthcare and retirement benefits, paid time off, and professional development opportunities as well as direct monetary compensation.

Contrary to popular beliefs of the past, overhead isn’t inherently bad—in fact, some is necessary to indirectly facilitate mission-critical activities. Tightening administrative spending too much can also have negative effects on your nonprofit. For example, if you reduce staff compensation to the point where your packages are no longer competitive with other similar organizations, it can lead to higher employee turnover rates and cause you to spend even more money on hiring.

However, if your nonprofit needs to cut costs, it’s best to evaluate where you can feasibly reduce administrative expenses before defunding your programs. For instance, you may look into whether the money you’d save on utilities by installing smart thermostats or low-flow bathroom fixtures at your facility would be worth the upfront investment in these devices. Or, rather than buying new office equipment outright, you could create a wishlist and send it out to donors so they can contribute the items you need in-kind.

Fundraising Expenses

The other piece of your nonprofit’s overhead is its fundraising expenses, which are the upfront costs associated with revenue-generating activities. The saying “you have to spend money to make money” rings true with nonprofit fundraising, and for your campaigns to succeed, you may invest resources into:

  • Subscriptions for specialized software, such as donation processors, peer-to-peer platforms, or workplace giving solutions.
  • Event planning needs like venue rentals, catering, and auction items.
  • Marketing material creation, from graphic design to website maintenance to printing and postage for direct mail messages.
  • Fees paid to fundraising consultants who assist with large-scale campaign planning and execution.

Like with administrative expenses, your nonprofit should also try to reduce fundraising spending before resorting to cutting program costs to balance your budget. For example, you might leverage free marketing tools to create DIY graphics instead of hiring a professional designer or audit your tech stack to ensure you aren’t paying for duplicate software subscriptions.

There is also a limit to how many fundraising costs you can reasonably cut. For instance, while you can procure many auction items by soliciting in-kind donations, you might not be able to get every prize you’d want to feature at your event for free, especially popular, big-ticket items like vacations or concert tickets. But if you seek out discounts and plan for a high return on investment (ROI) from your campaigns, you can make the most of your resources to engage donors in your work.

Expense tracking is critical for your nonprofit to leverage its limited resources for the greatest possible impact on its cause. Use the tips above to start evaluating your current recordkeeping and allocation approach, and don’t hesitate to reach out to a nonprofit accountant if you have additional questions or want an expert, outside perspective on how your specific organization could spend its money most effectively.