Securing grant funding is no easy feat. Between finding a relevant grant, preparing data and impact metrics, compiling a comprehensive proposal, submitting your application, and actually receiving funds, your nonprofit’s team must be diligent about every step of the process.
However, once you choose and obtain your grant, the cycle isn’t over. You must manage this funding properly to uphold grant requirements and funder stipulations. This process can also be quite complicated, especially for multi-year grants. This guide will break down the steps to follow so you can handle multi-year grants efficiently and effectively.
1. Review the grant agreement in detail.
Think of your grant agreement like a roadmap. It tells you exactly what you need to know and do regarding your grant funding. Look at this agreement carefully, making sure to:
- Identify whether the grant is conditional or unconditional. Conditional grants require your organization to meet certain conditions to earn funding, and if you don’t fulfill those requirements, you won’t receive the funds, or you’ll have to return them if you received them in advance. For example, you may be required to serve a certain number of beneficiaries through a new program using funds received from a grant. If you don’t meet that number, you’ll have to return the funds to the grantor. In contrast, unconditional grants have no conditions or barriers attached, nor a right of return. Whether your grant is conditional or unconditional will impact when you recognize funding in your financial statements.
- Highlight payment schedules. While some funders may disburse grant funding annually, others may wait until your nonprofit meets certain milestones or reporting requirements. Pinpoint your grant’s payment schedule so you know when to allocate funds.
- Note any restrictions. Like individual contributions, grants may also come with restrictions. For example, you may receive a grant specifically for your veteran education program that you may only use for that purpose. Restrictions will affect how you report the funds in your financial statements.
- Capture any grantor reporting requirements. While you should always carefully track and document grant-related transactions, some funders may require you to submit reports to prove you’re using the funds responsibly. For example, you may have to conduct and submit budget-to-actual reporting each quarter to show how closely your spending aligns with your budget.
In addition to these grant agreement elements, review any special clauses that further govern grant use and management.
2. Set up the grant in your accounting system.
As YPTC’s nonprofit accounting guide explains, “Your chart of accounts lists all the accounts your nonprofit uses to record transactions in its accounting system. Setting up your chart of accounts properly helps you better report and analyze your organization’s finances.” Categorize grant funding under revenue and support within your chart of accounts.
Depending on your nonprofit’s needs, you may create sub-categories for different grant types. For example, you may have sub-accounts for government and non-government grants. You can break down these categories even further with sub-accounts for federal, state, and local government grants and corporate and foundation grants. Additionally, you’ll classify grant funding according to its restrictions.
When you record the grant funding will depend on its conditions. While you can record unconditional grant funding for the year when you receive it and note future years’ funding as pledges receivable, you’ll defer conditional grant revenue recognition until you meet the associated conditions.
3. Create a budget and cash flow plan.
You may have had to develop a grant budget as part of the application process. Even so, revisiting this budget allows you to confirm that it aligns with the funder’s disbursement schedule and your program timeline.
Ensure your multi-year grant budget is effective by:
- Mapping your needs by year. While it may make sense to split funding evenly for each year of your grant, some programs may require more or less funding at different times. Determine your program’s annual goals to allocate resources appropriately. For example, the first year of a new project may require a greater investment in hiring new staff members and purchasing equipment, prompting you to allocate more of the grant funding to Year 1 than Year 2.
- Creating a cash flow forecast. Let’s say you have an unconditional grant. Even though you’ll recognize the full amount upfront, your funder may disburse it in installments. By forecasting cash flow, you can identify any gaps between when you receive funding and when expenses are due. This way, you can pay for those needs with other revenue sources.
- Account for expense increases. If your project spans multiple years, chances are that inflation and increased cost-of-living will cause your expenses to go up. Additionally, you may incur greater expenses as your program grows to serve a larger number of participants. For instance, if you’re expanding your nonprofit’s mentorship program and the number of mentorship pairs doubles, you may need to rent a larger facility for meetings, increasing your program expenses. Factor in these costs ahead of time so you can continue to staff and fund your program appropriately.
During the budgeting process, consider what your program’s future may look like once your grant expires. Be proactive about how you’ll generate and allocate revenue to keep your program intact.
4. Report grants properly.
To align with funder reporting requirements and comply with Generally Accepted Accounting Principles (GAAP), you must report grant funding in the following financial statements:
- Statement of Financial Position. You’ll represent multi-year grants as assets under pledges receivable since you haven’t yet received all of the funding. If you have a conditional grant and haven’t yet met the required conditions, you’ll report grant funding as a liability under refundable advance.
- Statement of Activities. Report grants under revenues and support as contributions, either with or without donor restrictions.
- Statement of Cash Flows. You’ll typically report grants under cash flows from operating activities. However, if grant funding is restricted for long-term purposes like capital projects or endowment funds, you’ll report it under cash flows from financing activities.
Audit your financial statements regularly to ensure you’re reporting grant funding properly. Alternatively, partner with a nonprofit accounting firm to compile these statements for you.
5. Establish internal tracking systems.
Between installment payments, reporting deadlines, and compliance checks, there are a lot of different dates and requirements to keep track of. While you can try to manage these elements of the grant management process on your own, grant management software simplifies this task by:
- Centralizing grant-related documentation so you can easily reference grant applications, contracts, and reports.
- Setting reminders for important deadlines so you meet funder requirements on time.
- Generating reports and dashboards so you can visualize and present grant data.
This tool is especially useful for multi-year grants because you’ll need to juggle various requirements and deadlines over a long period of time. Grant management software organizes and streamlines the process, allowing you to focus on fund allocation and program fulfillment.
6. Meet regularly with program staff.
While you know when to recognize grant funding accounting-wise, program staff members know when your nonprofit has reached the associated milestones needed for revenue recognition. By collaborating with program staff, you can better align program timelines with financial reporting and ensure everyone is well-informed about the grant management process.
Schedule regular meetings between your finance team and program staff. Learn more about program needs so you can adjust your budget accordingly. Clearly communicate funder requirements so program staff can notify you when conditions are met.
Both teams can also discuss potential risks in meeting grant objectives so you can resolve them ahead of time. For example, program staff may note that staffing a new program is taking longer than expected, prompting your human resources team to focus on how to accelerate the hiring process so your organization can kick off the program and receive grant funding.
While the steps in this guide will help you better manage multi-year grants, you may not have adequate time to dedicate to proper grant management and its associated nuances. If you need additional support, work with an outsourced nonprofit controller who can handle grant recording and classification, allocation methodologies, reporting requirements, and requests for reimbursements.