Grant Accounting – You won the award, what now?
I still believe that a fund accounting system is the best environment for tracking grants, and that QBO’s approximation of a fund accounting system is the best option for most nonprofits, given the cost savings of a TechSoup QBO license. There are plenty of wrong ways to do it, but on the other hand a few ways that are “right enough to get the job done.”
I suggest categorizing your grants into 3 categories, at most. You could make the argument for more, but at some point each new grouping, aspect or revenue type increases the complexity of your books by an order of magnitude, and mistakes become an order of magnitude easier to make. Simpler is better. That goes for a lot more things in life than just an accounting system.
The key to all of these a thorough read of the grant document. It never hurts to talk to the program manager if you have any questions, or failing that, reach out to the funder. When you do that, you may come up with the same categories I do:
- Category 1: Scope of work (SOW) – These grants stand out because the resemble something you might see in the for-profit world – in fact, you might be competing with for-profit companies for these kinds of grants. They will generally involve a “deliverable” of some sort, that will define the timing of the revenues for your budget, which you may be able to program as recurring transactions. You can “turn a profit” on these, which are great for diversifying revenue streams. If the grant is for $20k and you only have $15k in expenses in meeting that deliverable? Congrats! The other way around: not so much.
- Category 2 - Cost Reimbursement (CR). Will all your federal grants or subgrants be CR? Maybe. Be careful – as a subcontractor on these grants you may have to account for them differently, and it is sometimes hard to tell whether you are a subgrantee or a subcontractor. As the name suggests, this is a grant in which the grantor has agreed to pay certain expenses to do a certain thing, and they will only pay you after you have made those expenses and reported those costs to them.
As such, you literally recognize the revenue as you spend on the appropriate programmatic expenses –every month or quarter, for instance, when you invoice. Of course, they may not pay your invoices in a timely manner, which can lead to some crippling cash crunches. I probably don’t have to tell you this, but if your organization is dependent on these, make sure to have a line of credit or some kind of rainy day fund for difficult times.
It’s these grants, more than others, that really are a burden to track. You have to track actual expenses, will probably record those revenues monthly, but only send invoices quarterly. That means what your Accounts Receivable may show may not reflect the amount you have actually invoiced at any given point! Of course, there are always a lot of issues in getting them paid.
It ends up being surprisingly more complicated than you would imagine, especially if some adjustment takes place to a period you have already invoiced for – and you might have to recalculate your indirect costs based on those changes, which can lead to a cascade of accounting adjustments.
- The third category can sometimes be combined with the CR grants, because revenue is recognized when appropriate costs are incurred, so the regular accounting transactions are similar. I often hear them referred to as “Net Assets with Restrictions” or “Foundation” grants, because most foundation grants are in this format. Unlike cost reimbursement, they generally will give you the funding up front, which I am sure you can see the appeal of. The specification of a “right of return” is usually one of the clues on categorizing these types of grants as opposed to a donation without restrictions.
Pro tip: I haven’t found a good way to do grant accounting without needing a little bit of outside tracking, but I am open to suggestions. Personally, I find it’s helpful to make a little “cheat sheet” about the grant if there are a lot of grants to track, and to store it somewhere where everyone who is involved in managing the grant can reach it. Start with the basics: how much, the grant period, indirect cost rate, (more on this), and any important rules on the use of the funds, as well as any special note about recognizing revenue, especially if this is different from the imported budget. I also recommend tracking the expenses and revenues recorded, because if someone makes an adjustment to a prior period that changes the recorded amounts (they shouldn’t, you say, and I agree), you need to be able to reconcile that.
This is a good thing to share with your auditor, too – It can be quite a mess when your auditor interprets a grant differently than you do, and you have to undo a year’s worth of entries during the audit. Consider keeping your auditor in loop during the year – most would rather spend an hour during the quieter parts of the years than 2 hours untangling things during audit season!
I hope to be able to share some things with you later: a template for tracking a full roster of grants in excel, and more about what the actual transactions look like for the categories of grants I outlined above. Also, would love to hear all of your tips and tricks – after all, sharing is caring.
