Nonprofit Expenses: A Guide for Finance Teams

Nonprofits face a unique challenge: drive mission impact while maintaining transparency, control and donor confidence. Managing expenses effectively is key and finance teams are at the center of that mission. 

Recent research showed that nonprofit leaders entering 2025 were most concerned about financial instability due to uncertain revenues and rising expenses, highlighting the critical importance of effective expense management systems. 

This comprehensive guide walks through how to structure, categorize and streamline nonprofit expenses using automated expense management software for better financial health and IRS compliance, giving your organization the tools needed to maximize every donated dollar. 

Why Expense Tracking Matters More Than Ever for Nonprofits 

For nonprofits, accurate expense management isn't just good practice, it's a requirement that directly impacts your organization's sustainability and credibility. In 2024, trust in nonprofits increased as trust in other sectors fell, making financial transparency more crucial than ever. 

Effective expense management impacts: 

IRS Form 990 reporting: Certain exempt organizations must file Form 990 to provide the IRS with required information under section 6033. Accurate expense categorization is essential for compliance and maintaining tax-exempt status. 

Donor trust and transparency: With donors increasingly scrutinizing how their contributions are used, clear expense tracking demonstrates responsible stewardship and builds long-term relationships. 

Grant eligibility and fund audits: Grant-making organizations require detailed financial reporting. Poor expense documentation can lead to funding delays or clawbacks. 

Operational decision-making: Real-time expense data helps leadership make informed decisions about program expansion, staffing and resource allocation. 

Financial sustainability: With 85% of nonprofits reporting concerns about rising costs while funding remains uncertain, every expense decision matters more than ever. 

Key Nonprofit Expense Categories: A Strategic Framework 

Understanding how to properly categorize expenses is fundamental to nonprofit financial management. The IRS requires specific functional classifications that directly impact your organization's public perception and compliance status. 

Functional Expense Categories 

Nonprofits typically organize expenses by function to demonstrate how resources support their mission:

1. Program Expenses: Direct costs of delivering your mission

• Staff salaries for program delivery 

• Materials and supplies for services 

• Travel related to program activities 

• Equipment used exclusively for programs
  
  
• Facility costs allocated to program space

2. Management & General: Administrative costs necessary for operations

• Executive and administrative staff salaries 

• Office rent and utilities (allocated portion) 

• Professional services (accounting, legal) 

• Insurance and general office supplies
  
  
• Board meeting expenses

3. Fundraising: Costs associated with generating revenue

• Fundraising event expenses 

• Donor outreach and communication 

• Grant writing and prospect research 

• Fundraising staff salaries 

• Marketing and advertising for donations 

Best Practice: Aim for at least 75% of total expenses to be program-related. This ratio is closely watched by donors and rating organizations like Charity Navigator. 

Tracking by Expense Type 

You should also categorize expenses by their nature to improve budget planning and cash flow management: 

1. Recurring expenses (predictable monthly/annual costs) 

• Staff payroll and benefits 

• Rent and utilities 

• Insurance premiums 

• Software subscriptions 

2. Variable expenses (fluctuate based on activity levels) 

• Travel and transportation 

• Program supplies and materials 

• Event catering and venue costs 

• Contractor and consulting fees 

3. One-time expenses (non-recurring strategic investments) 

• Capital equipment purchases 

• Major fundraising events 

• Technology implementations 
• Building improvements 

IRS & Grant Compliance 

Compliance requirements for nonprofits extend far beyond annual tax filings. Organizations must file their annual returns electronically unless covered by specific exceptions and the documentation supporting these filings must be impeccable. 

Essential Compliance Requirements 

Documentation standards: Every expense must have supporting documentation that includes: 

• Original receipts or invoices 

• Clear business purpose description 

• Approval authorization 

• Proper account coding 

• Date and amount verification 

Approval workflows: Implement multi-level approval processes based on expense amounts: 

• Under $100: Department head approval 

• $100-$1,000: Finance director approval 

• Over $1,000: Executive director or board approval 

Grant-restricted fund tracking: Many grants come with specific spending requirements and reporting deadlines. Key considerations: 

• Separate accounting for each restricted fund 

• Regular reconciliation of grant budgets vs. actual expenses 

• Quarterly reporting to ensure compliance 

• Documentation of allowable vs. unallowable costs 

Audit preparation: Maintain organized records that can withstand external scrutiny: 

• Digital storage with backup systems 

• Clear filing systems by date and category 

• Regular internal reviews and reconciliations 

• Annual independent financial audits for larger organizations 

Risk mitigation: Poor recordkeeping can lead to: 

• Grant clawbacks and funding suspension 

• IRS penalties and loss of tax-exempt status 

• Donor trust issues and reputational damage 

• Board liability and governance concerns 

Understanding these requirements upfront prevents costly corrections and maintains your organization's credibility with all stakeholders. 

Best Practices for Nonprofit Expense Policies 

A well-crafted expense policy serves as your organization's financial guardrails, ensuring consistency and compliance while empowering staff to make appropriate spending decisions. 

Policy Framework Essentials 

Define reimbursable vs non-reimbursable items: 

• Travel: reasonable accommodations, economy flights, ground transportation 

• Meals: per diem rates or actual costs with receipts (IRS limits apply) 

• Professional development: training, conferences, certification courses 

• Non-reimbursable: personal items, alcohol (unless part of donor events), luxury accommodations 

Establish clear approval requirements 

• Pre-approval thresholds by role and expense type 

• Emergency spending protocols 

• Budget variance approval processes 

• Vendor selection and contract approval levels 

Set submission requirements and deadlines 

• Receipt submission within 30 days of expense 

• Complete expense reports with business justification 

• Monthly deadline for processing (e.g., 5th of following month) 

• Digital receipt capture using mobile apps 

Implement spending caps and controls 

• Daily meal allowances aligned with GSA rates 

• Maximum hotel rates by geographic region 

• Annual professional development budgets per employee 

• Vendor spending limits requiring competitive bidding 

Mobile and Digital Considerations 

Modern expense policies should accommodate remote work and mobile staff: 

• Mobile receipt capture requirements 

• Digital approval workflows 

• Cloud-based expense report access 

• Real-time budget monitoring capabilities 

A comprehensive expense policy protects both the organization and its employees while streamlining the reimbursement process for everyone involved. 

The Strategic Advantage of Automated Expense Management 

Manual expense processes simply can't scale with growing nonprofit operations. Organizations struggle with issues surrounding technology and must put the right systems in place to track data and automate manual processes. 

Resource optimization: With 95% of nonprofit leaders concerned about staff burnout and 50% finding it difficult to fill staff vacancies, automating routine financial tasks frees up precious human resources for mission-critical work. 

Real-time visibility: Automated systems provide instant budget tracking, helping prevent overspending and enabling proactive decision-making. 

Compliance assurance: Digital workflows create comprehensive audit trails and ensure policy adherence without manual oversight. 

Key Automation Features for Nonprofits 

Centralized expense platforms should include: 

• Integration with accounting systems (QuickBooks, Sage, etc.) 

• Grant and project-specific tracking capabilities 

• Mobile apps for field staff and volunteers 

• Automated receipt capture and categorization 

Intelligent approval workflows that: 

• Route expenses based on amount, type and department 

• Flag policy violations before submission 

• Accelerate approval cycles with mobile notifications 

• Maintain complete approval histories for auditing 

Budget controls and alerts featuring: 

• Real-time budget tracking by program and department 

• Automated alerts before budget limits are reached 

• Grant spending monitoring with deadline reminders 

• Custom reporting for board and funder requirements 

Advanced reporting capabilities including: 

• Form 990 preparation support 

• Grant compliance reporting 

• Program cost analysis 

• Donor stewardship reports showing fund utilization 

Implementation Best Practices 

When selecting and implementing automated expense management software: 

1. Assess your specific needs: Consider organization size, grant requirements and compliance complexity. 
   
   
2. Ensure integration capabilities: Choose systems that connect with your existing accounting and banking platforms. 
   
   
3. Plan for user adoption: Provide comprehensive training and ongoing support.
    
   
4. Start with pilot programs: Test with one department before organization-wide rollout.
    
   
5. Monitor and optimize: Regularly review system performance and user feedback. 

The right automation strategy transforms expense management from a compliance burden into a strategic advantage, providing the financial intelligence needed to maximize mission impact. 

Building Financial Confidence Through Smart Expense Management 

Expense management in the nonprofit sector is as much about impact as it is about accountability. When done right, it becomes a strategic tool that enhances your organization's credibility, efficiency and mission effectiveness. 

Organizations with sophisticated expense management systems can: 

• Respond faster to grant opportunities with accurate financial data 
  
  
• Demonstrate fiscal responsibility to major donors 
  
  
• Allocate resources more strategically based on real-time insights 
  
  
• Reduce administrative costs and redirect funds to programs 

With government grants and foundation funding not rebounding to pre-pandemic levels and individual donors scaling back contributions, efficient expense management becomes even more critical for organizational sustainability. 

With the right policies, processes and technology in place, your team can ensure every dollar is spent wisely and confidently report that impact to donors, regulators and the communities you serve. 

Ready to Transform Your Nonprofit's Expense Management? 

ExpensePoint's comprehensive platform is specifically designed to meet the unique needs of nonprofit organizations. Our solution helps nonprofit finance teams: 

• Automate reimbursements with intelligent workflows that ensure policy compliance 
  
  
• Enforce spending rules in real-time to prevent budget overruns and policy violations 
  
  
• Prepare for audits with comprehensive documentation and reporting capabilities 
  
  
• Track grant compliance with project-specific reporting and fund restrictions 
  
  
• Generate Form 990 reports with properly categorized functional expenses 

From small community organizations to large national nonprofits, ExpensePoint provides the financial controls and visibility needed to maximize mission impact while maintaining donor confidence. 

Ready to see how ExpensePoint can streamline your nonprofit's expense management?  Contact our team for a personalized demonstration tailored to your organization's specific needs.