Your nonprofit understands that an effective grants management system will help you track the progress your team makes when it comes to submitting grant applications and keeping track of deadlines. However, that’s not all an organized system will help with!
As one of the primary means nonprofits use to make money, grants are also essential to your nonprofit’s accounting processes. In fact, there are three steps to the grants management process that are deeply intertwined with your accounting team:
In this guide, we’ll walk through these three steps and discuss how you can maximize your fundraising revenue and ensure you’re taking accounting processes into consideration. Let’s get started.
Searching for Grants
One of the first essential steps for grants management is searching for grants that will help fund the various aspects of your nonprofit’s mission. There are several types of grants to choose from and various search tools to comb through to find the options that will be most impactful for your organization.
Often, the type of grant you choose is very important because many grants tend to be restricted for specific purposes. Your accounting team can take account of those restrictions and help provide guidance on how to best record and use them.
Some types of grants you may encounter include:
- Unrestricted grants (usually provided by the federal government). These grants can be allocated to any aspect of your mission, whether it’s internal overhead expenses or program costs. These are incredibly helpful, as they allow your organization to determine your greatest need for the funds. However, they’re not very common grants.
- Funds provided for specific programs or projects related to your mission. Grants provided by community foundations or public charities are usually restricted to the purpose for which you outlined the grant in your written proposal. Often these grants also have specific restrictions you must also take into account when writing your proposal. These are the most common grants nonprofits apply for.
- Grants to fund internal projects at your organization. For example, you may receive a grant that helps with your marketing strategy, providing the funds you need to spread the word about your mission. Re:Charity’s example of this is a Google Ad Grant, which provides up to $10,000 in ad money for nonprofits, but can only be applied to these advertisements.
Because grants are most frequently restricted to specific aspects of your mission, it’s important to consider which of your nonprofit’s programs need funds before beginning your search. Openly communicate with your accounting team to determine existing restrictions and if there are any aspects of your program budgets that need a boost.
For example, say your nonprofit needs $6,000 to fund Program A and $4,000 to fund Program B. If you’ve received a $7,000 donation restricted to Program A, you probably don’t need to look for a grant that will also help cover that program. Your efforts would be better spent looking for a grant that may be restricted to Program B. Your accounting team records where all of your existing restrictions lie so your organization can consider them before writing your next proposal.
This approach will require your development team to be selective about the types of grants your organization applies for. Consider opportunities for additional professional development across this team to teach them the skills they need to effectively and efficiently sort through and apply for the best grant opportunities.
Recording Grant Monies
Once you’ve applied for and won the best grants for your organization’s mission, your accounting team will need to record these monies in your accounting system. While your development team may record the funds the same way, no matter the type of grant, your accounting team must record the funds in your ledger according to the generally accepted accounting principles (GAAP).
These are the three types of grants to keep an eye out for and the different recording requirements for each:
- Unconditional grants: Unconditional grants are those without any contingencies or requirements to be considered. These can be recorded right away as soon as you receive the letter informing you of the award.
- Grants with contingencies: If a grantmaker requires your organization to meet certain requirements before providing a number of installments for the grant funding, your organization must meet those contingencies before recording the funds. Therefore, you’ll record the funds at the time of each installment.
- Reimbursable grants: Sometimes, grants will be provided to nonprofits only if you front the costs. Then, grant monies are provided to repay your organization for the expense. In this case, your nonprofit will record the grant at the time when you receive the funds.
Keeping proper records of grants is essential for your nonprofit to meet the accounting requirements set for nonprofits. This is not only an important way to stay organized, but it will also create an easier nonprofit financial auditing process if you need to conduct one in the future. In fact, it could be essential to win future grants as well! Some grantmakers require your organization to conduct a financial audit before they’ll award grant monies.
Tracking Grant Funding
After you’ve won grants and recorded them as revenue, you’ll also need to keep track of how they’re allocated for your mission. As we mentioned before, grants are often restricted to a specific purpose for your organization’s mission and must, therefore be allocated specifically in your budget.
As you can see, unrestricted funding can be used for any purpose your organization deems most important. However, restricted funding must be used for the purpose dictated by the grantmaker or donor.
Be sure your organization has an effective way to record how restricted grant funds are allocated. This will help your organization to:
- Maintain accountability to the grantmaker. You will likely need to report back to them how you’re using the funds they provided. Otherwise, they may be able to sue your organization for misuse of funds.
- Report back to the IRS how you used restricted funds. According to Jitasa’s guide to restricted funds, the IRS takes restricted funds very seriously. If you can’t report how these funds are used or misuse them, you could face penalties from the government.
Avoid these issues by ensuring you’re maintaining an effective accounting system. Use the proper systems to allocate and record allocations accurately to reflect your accounting statements, ledgers, and reports. Also, maintain open communication between your development and accounting teams to ensure they’re both on the same page and the records of funding match up and can be reconciled.
Grants management is key for nonprofits to gain the funds they need to support their mission. It can be confusing and challenging, though! With an understanding of the accounting side to grants management and an effective system to help track the proposal progress, various requirements, deadlines, etc., your organization will be well set up to make the most of this funding.
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 not for profit organizations.