The failure by a nonprofit organization to manage grant funds wisely and fulfill its obligation to donors can lead to negative publicity, litigation, criminal prosecution, and the revocation of grant funding or tax-exempt status. It is definitely exciting when you get a sizable grant and can deposit a big sum in the bank. However if the grantor has placed any conditions on the grant, such as the period during which you can spend it or the kinds of things you can spend it on, you will need to be able to track the satisfaction of those restrictions. Likewise, it’s a sad day indeed when an executive director realizes that, although there’s plenty of money in the bank, most of it is restricted, and the unrestricted fund is actually in debt. Don’t let this happen to your nonprofit organization; build procedures into your accounting that will enable accurate reporting on restricted grant funds.
Here are a few tips to help keep your nonprofit organization out of trouble:
- Familiarize yourself with grant award documents so you know what types of expenses are allowable.
- Identify and understand each donor’s reporting requirements.
- Create a funding grid that details how the grant funds received have been allocated and spent. A funding grid assists you in tracking how much of your budget is funded and by whom. It contains columns that identify the various donors and compares the funds received against your master budget and the actual costs incurred.
- Purchase suitable financial-management software that will allow you to properly record grant activity in a way that is meaningful.
- Adopt a detailed coding system that can categorize expenses to a cost type (i.e., salaries) as well as to a specific cost center (i.e., behavioral health program).
- Set up your chart of accounts in such a way that you can map from your own account codes to the grantor’s codes if they are different.
- Document payroll allocations as evidence of time spent on individual programs.
There are substantial advantages of properly managing grant awards. Proper processes can help you to make optimum use of restricted funds. They can help to identify instances of duplicate funding (activities that are funded simultaneously by more than one donor). An accurate method would also help identify gaps in project funding (especially overhead costs) or help you make decisions with the allocation of unrestricted funds. After the appropriate analysis, you may find that your organization needs to go back to a donor to see if there is any flexibility in the restricted budgets.
In addition, good systems will allow for stress-free reporting according to the donor’s specified format. Naturally donors want to support organizations that can prove their donation was spent as promised. Accurate reporting of grant funds instills confidence in donors, which could lead to future funding!
