4 Strategies for Improving Your Grant-Based Accounting
Grants are a boon to nonprofit budgets, but they also come with their own accounting challenges. Here are four pointers on how to understand grant agreements; stay in compliance with program requirements; choose the right software to track and report funding; and create reports – often one of the most time-consuming parts of managing grants.
Read and understand your grant agreements.
Though it may seem basic, the most important component of grant-based accounting is to read your grant agreements carefully. This will help ensure you manage your grants according to the funding agency’s requirements.
First, locate your Assistance Listing (AL) and/or Catalog of State Financial Assistance (CSFA) numbers in the agreement. The AL number corresponds with your federal funding source, while the CSFA number is linked to your state funding source. Look up these numbers online to be sure you understand the requirements of the program under which you fall.
If you receive more than $750,000 in grant funds, you must keep track of expenditures by your AL and/or CSFA number for your schedule of federal awards and state financial assistance. This schedule is a key part of your audit. If your grant is less than this amount, you still need to comply by the rules of your particular federal or state program and will undergo fiscal monitoring (even if you don’t have an audit).
Second, be sure you understand when you will receive your grant funding. While some agencies provide money at the outset, many require you to submit a request to be reimbursed. In these situations, you must have enough cash to float your expenditures while you await reimbursement. Keep in mind that this process could take months.
Third, look at the grant’s deliverables and deadlines. This is especially important if you have a unit rate contract. These contracts operate based on the number of clients served – for example, how many people are serviced by a homeless shelter. Some grants also come with a set of deadlines by which you must use a certain portion of your funding.
“You need to make sure that you’re meeting those deliverables, or you could be at risk of having to return some of your funding,” said Corinne Turcotte, nonprofit CPA and partner with James Moore & Co. “Make sure that you’re aware of your deadlines and that you’re keeping track of them, so that you don’t end up having to give back money that you could have used.”
Finally, know your grant manager and be proactive in communicating with them. Having a good relationship with your point person at a funding agency can help the reporting process go smoothly.
“That relationship is so critical,” Corinne said. “It’d be better to talk to them up front when you issue your first report and say, ‘Hey, can you let me know if this looks right or if I’m missing anything?’ Make sure that you are on the same page.”
Stay on the right side of grant compliance requirements.
The biggest difference between grant funding and other sources of income is compliance. Money gained through fundraising or public contributions might not come with strings attached. With grants, however, you must manage your expenditures and run your program according to the funding agency’s requirements.
There are several steps you can take to help ensure grant compliance.
Differentiate between restricted and unrestricted funding. While certain grants may give you a general bucket for operating expenses, others might require you to submit a detailed budget with line items.
Make an accurate budget. An agency may not permit you to adjust line items later or could require you to submit a budget amendment. Once your budget has been approved, “I have seen agencies say no and be sticklers about how much they’re allowing to move,” said Tiffany Edwards, CPA and director on the nonprofit team at James Moore.
Know which expenses are allowable. This is the most critical component of compliance. You are responsible for spending money in accordance with the terms of your grant, which will differ by program.
Most grant awards have an administrative cost cap. This is applicable to your management and general costs and differs from indirect expenses. Keep in mind that direct costs can be both programmatic or administrative, while indirect costs are almost always administrative. Personnel costs often fall into the indirect cost pool.
“Whatever you include in your indirect rate, don’t directly allocate it to your program because then you’re going to be double-dipping,” Corinne said. Examples of costs that are typically unallowable include bad debt expenses, alumni expenses, alcohol and certain types of fundraising and public relations expenses.
Meet match requirements. Some grants require you to generate a certain percentage of funding yourself. Matching funds often consist of cash produced through fundraising, public contributions, unrestricted dollars or other grants. Some grants allow you to count gifts in-kind, such as donated goods or services. If you receive discounts from vendors because of your nonprofit status, be sure to include those.
Keep in mind that the amount of matching funds is calculated as a percentage of the total project cost (the sum of grant funds and match funds) not the amount of grant funds requested. For example, if your grant amount is $100,000 with a match of 25%, the total project cost is $133,000, with the match amount being $33,000.
Adhere to procurement guidelines. The Office of Management and Budget (OMB) requires you to obtain multiple quotes for services that cost more than $10,000. Costs in higher dollar ranges may require a formal sealed bid process. Check the Code of Federal Regulations (eCFR) to be sure you are following appropriate protocols. Keep documentation of your quotes and bids as proof.
Make purchases early. Ordering supplies right before the end of your award term may run afoul of compliance guidelines. You need to show you have the assets in hand and are using them during the program period.
Prepare for monitoring. If you are using grant funds directly, keep thorough records that will show monitors you’re in compliance. If compliance issues arise in monitoring, your future funding could get reduced or taken away altogether.
If you receive grant funding but pass this money on to other groups, the OMB requires you to monitor them. Ultimately, you are responsible for those dollars and must double-check that grant subrecipients adhere to grant requirements. If they are not, you must issue a corrective action plan and make sure they make the recommended improvements, or stop using them as a subrecipient.
During your internal monitoring process, keep fiscal monitoring and programmatic monitoring separate and assign different people to each.
“It takes a joint effort of a team working together to make sure you’re monitoring appropriately,” Tiffany said. “If you have a problem with a subrecipient and you aren’t monitoring them well, it’s going to fall back on you. That’s the biggest thing to remember.”
Prepare for audits, when applicable. Federal or state grants with over $750,000 of expenditures in a year trigger a single audit. This amount constitutes a separate threshold for federal and state levels, meaning you may undergo audits from both.
Choose and use the right software.
Selecting the right software can simplify your tracking and reporting processes. Many programs store invoices and receipts and generate custom reports, saving time in the long run. Choosing software that’s the best fit for your nonprofit requires thought, a look at your current process and consideration of your reporting requirements.
“It is a painful process, but normally the outcome is worth the pain,” Tiffany said. “The best way to figure out which dimensions are important to your agency is to start out with what your required reporting is and work backward as to how do we get there and what level of detail do we need in the accounting system.”
Factors to consider as you evaluate accounting systems include:
- Reporting – What kinds of reports do you need to submit and in which formats? Do you also need to present to your board or the executive leadership team?
- Funding sources – You may need a robust system that can simultaneously track multiple funding sources, independent grant programs and multiple award numbers across various timeframes.
- Cost-benefit analysis – For nonprofits, it’s important to select a software at the right price point. Avoid programs that are more elaborate than you need.
- Staff training – Consider how much time and training your staff will need to become comfortable with a new tool. Include their voices in the selection process.
- Compatibility with other software – Will this software integrate with other tools that you currently use? Does it offer protection from cybersecurity threats?
Talk to your CPA, auditor and peers at fellow nonprofits before settling on a program. After you’ve made your selection, a platform transition company can help ease the process of migrating your accounting data.
Custom reporting takes time, especially at the outset, but it can save your nonprofit money in the long run. Be sure to also include your budget information in your reporting software.
“It’s important to utilize the modules of your software to the fullest because, while it may take more time on the front end, it is going to pay itself back very quickly in terms of the amount of time you spend monthly on reporting, importing, reconciling and everything like that,” Corinne said.
Keep track of fiscal and programmatic reporting requirements.
As you read your grant agreement, compose a detailed list of requirements. Most grants have both fiscal and programmatic reporting requirements. Matching funds can be included with fiscal reporting.
Be sure to submit your reports in a timely manner, as some agencies impose a penalty for tardiness. Bundle and include all required documentation. Pay attention to requests from your grantor for specific documents. Proactively submitting these going forward can help sidestep unnecessary delays in the payment process. Also, be sure that you and your grantor have a secure way to exchange sensitive financial information.
“The fastest way to get paid is to include all the information from the beginning,” Tiffany said.
Managing grants can get tricky from an accounting standpoint. Taking these steps —and talking with an experienced nonprofit CPA – can make it an easier process.
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