The Importance of Grant Management in Nonprofit Accounting
Nonprofit organizations are unique in that they rely heavily on the generosity of others to operate effectively. This means they must keep in mind the various forms of fundraising, always looking for the latest trends of the sector to incorporate into their strategies. Revenue from individual fundraising is generally some of the most versatile type funding for nonprofits, available for operating expenses as well as program costs.
However, another great source of revenue for nonprofit organizations comes from grants. While this revenue is rarely as versatile, often dedicated to specific projects or initiatives, it can still make up a significant portion of a nonprofit’s budget.
To make the most of both your grant monies and your individual fundraising revenue, your organization needs an effective management system and a plan for all of the funds that enter your bank account.
That’s why we’ve developed this guide to help nonprofit leaders like you to better understand the challenges of grants, where those challenges come from, and tips to better manage and expand this aspect of your finances. We’ll cover the following topics:
When your organization submits grant proposals, it’s essential that you have an effective method of organizing the various grants you receive so that you can budget effectively and record funds appropriately. Let’s dive in to see why this can be challenging for many nonprofit organizations.
Challenges of Grant Management
For organizations that simply have one or two grants funding various projects on an annual basis, managing those funds and grant requirements may not be too difficult. However, the more grants that are won, the more difficult it becomes to keep track of different reporting requirements and procedures.
For example, Getting Attention’s guide on marketing grants lists out some of the most common grants that nonprofits can apply for. Let’s say your education-focused organization wins three of the grants on that list, one from 3M Foundation, one from the Coca-Cola Foundation, and one from the Walmart Foundation. Each has different reporting requirements and supports specific potential projects at your organization:
- 3M Foundation offers grants to help organizations with STEM fields. Let’s say you decide to use it to fund a program supporting girls’ introduction to science and math in grade school. That’s where it would need to be allocated in your budget. On top of that, let’s say you need to report to them by November 31st annually.
- The Coca-Cola Foundation awards grants to support community initiatives. Let’s say you promise to use this funding for a program that supports kids’ involvement with community sports teams. They require you to report the spending of the grant monies by December 31st annually.
- The Walmart Foundation awards grants for organizations supporting projects for opportunity creation, sustainability, community building, and racial equity. You use these funds to support an advocacy program to help all kids receive equal access to education. Let’s say they require reports by January 1st.
All of the monies you receive from each granting organization must be correctly allocated in your budget and recorded properly in your system. That way you can make sure all records are kept correctly internally for auditing purposes, and externally to communicate with grant funders on time and correctly.
Types of Grants
In addition to the timelines and requirements being different among various grants, organizations also need to record the monies from grants at different times depending on the type of grant. This is to stay compliant with the Generally Accepted Accounting Principles (GAAP).
Jitasa’s grant management guide provides the following summary image of the different types of grants:
Effective grant management will help you keep track of the types of grants you’re applying for and ensure you appropriately record the money in your fund accounting system.
Recording Unconditional Grants
When you host a Giving Day for your organization, a lot of the money you generate is considered “unrestricted,” meaning it can be used however you want to, whether for projects, operational costs, or other elements of your budget. Most organizations rely on various types of fundraisers to gain this funding. However, there are some grants that offer unrestricted funds as well! These grants are considered unconditional.
Unconditional grants can be challenging to find. Grantmakers can add restrictions to the funds depending on how you use the funds. When you apply for the grant, it will likely be more successful if you have a plan for the money and a corresponding budget that can be directly tied to your organization’s impact. Plan carefully for these grants and don’t treat them as a free-for-all.
Unconditional grants are recorded as soon as you know you’ve won the grant. If you receive an award letter, you can record the grant right after you receive that. If there is no reward letter, you can record the grant monies after you receive them.
Recording Grants with Contingencies
Some organizations require your organization to fulfill certain conditions designed by the grantor in order to receive the funds. Generally, this money comes in installments over time as the recipient meets the requirements set by the grant funder.
In this case, your nonprofit organization would record the money as it is awarded to your organization. If it’s provided in two installments, you would record those installments as they’re paid to your organization.
Recording Reimbursable Grants
Reimbursable grants are those contributed to organizations only after they’ve incurred the costs for the program the grant will cover. For instance, if a company provides a grant that will cover an educational program for your nonprofit, you’ll need to first pay for the program. Then, the grant will be paid to reimburse your organization.
In this case, your organization will record the expenses as they occur, then the funds as you receive them.
Tracking Your Grants
Because there is so much variation in the type of grants you can receive, where the monies will be allocated, and how you’ll report on the funds, it’s necessary to have an effective system to track grant funds.
When it comes to grant tracking, your organization needs to be sure to:
- Set up a concrete budget. An effective budget allows your organization to compare the projected and actual flow of grant funds as you use them to push your mission forward. You will be able to provide accurate information to your funder when you report on the grant and show exactly where the monies have been spent.
- Create reminders for deadlines. When grant funders all have different deadlines, it can be challenging to make sure you hit the right ones with the right information at the right time. Set up calendar reminders as well as reminders in your accounting system to make sure you don’t forget about important dates and details.
- Leverage fund accounting software. Your accounting software will have the functionality to help you record all of the proper information about grants, especially if that software is specifically used for nonprofit organizations.
Effectively tracking your grants will help your organization ensure you never miss a deadline and that all of the funds are used for the appropriate projects. It’s preferable to set up your system when you start relying on grants, and essential when you win several grants throughout the year.
Tips to Win More Grants
To manage your grants, you first need to win them! Luckily, with a good grant writer and a compelling mission, winning grants is very doable. To help you, we’ve compiled a list of tips that can help your organization avoid the pitfalls of grant writing:
- Prioritize your needs and determine the costs of each. When you prioritize your needs, you’ll have a better idea of where grants would be the most useful in your strategy. Then, you can search for the grants that will be most helpful for your mission.
- Start with a rough outline. Before you start applying for grants, create a rough outline of the project you want to create and how you’ll use the funds. This will help make sure you communicate the most accurate information to your funders and will be successful with the funds.
- Tell your story in your grant proposal. Grant proposals lean heavily on metrics and factual information, but be sure to also tug at your readers’ heartstrings. Tell them the story of your mission and how it impacts the community, backing up your claims with the facts and statistics.
- Conduct detailed research for your proposal. Grant proposals can take a lot of time to complete. However, funders don’t try to understand why research didn’t get done. Make sure to allocate enough time and resources to research and communicate all of the potential questions the funder might have.
- Triple-check the instructions for the grant. If you don’t follow the instructions for the grant, you won’t win it. Double and triple-check to make sure you’ve provided all information and have met all of the necessary requirements.
- Ask a third party to check your math. Incorrect math or unrealistic budgets can create a bad or confusing experience with your funder. Ask a third party like your nonprofit bookkeeper or accountant to double-check the numbers for you to make sure you’re creating the best possible experience for your funder.
Grant proposals should not be rushed. They require time and effort to make them convincing and effective. Use your proposal to plan out projects and funding for your organization. Then, communicate those plans to your funder.
Grants are a key source of funding for nonprofit organizations. However, when it comes to accounting for these funds and managing expectations, they can become more challenging. Make sure you have a comprehensive understanding of how grants are awarded and recorded so that you never miss a deadline and ensure funds are used appropriately.
About the Author:
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to nonprofit organizations.