What should nonprofits consider before applying for or accepting a new grant?

Every nonprofit has a mission in mind, which requires various funding sources such as contributions, grants and program revenues. Grants come in many forms and capacities, and some may be more or less advantageous than others. Let’s discuss what to consider when applying for or accepting a new grant.

Ask: How will this grant help us meet our mission?

First, executive directors and grant managers need to consider if the grant will advance and is in line with the nonprofit organization’s mission. To provide a broad example: a grant to support re-foresting a devastated burn area doesn’t make a lot of sense for an organization built to advocate for immigrants but makes perfect sense for an organization designed around nature conservation. Not every source of funding will align with your nonprofit’s mission. This is especially key when considering the additional administrative burdens restricted funds requires, such as additional expense tracking and reporting, monitoring activities, or attending meetings.

The nonprofit’s strategic plan should be in writing and designed to accomplish its mission. This plan document should outline clearly defined “Calls to Action”. All strategic plans should have specific action points and goals with personal responsibility assigned. When we say Calls to Action, we are referring to the certain individuals that are called by the organization to provide leadership and direction to achieve certain goals. In other words, the strategic plan should have specific goals with specific people assigned to accomplish those goals. This plan guides the organization towards the most appropriate grant sources and ensure that your organization’s limited resources (personnel and operational expenses) are spent for the greatest return. Nonprofits can’t afford to get distracted from the organization’s mission and goals, chasing after every opportunity.

Understand the Grant Terms & Conditions

Most grants contain some sort of “terms and conditions” language that has significant impact to how the funds are spent, and therefore, on your nonprofit’s operations. For example, the grant requirements may impose restrictions on spending in connection with the project, invoicing, and financial reporting in order to receive grant funds or have expenses reimbursed.

Watch for terms that require your organization to take on additional compliance responsibilities. Grantors – particular governmental agencies – may impose specific reporting requirements that change how your nonprofit organization handles compliance. Grantors may also write grants that effectively make your organization a sub-recipient rather than a service vendor, which unexpectedly puts you in a lot of administrative and compliance responsibilities. Such a grant may require reporting to a third party that wouldn’t be involved if you were simply acting as a subcontractor. Be sure that any grant you apply for doesn’t have overly cumbersome regulations attached.

Understand the Grant Compliance Requirements

Most grants do have some sort of compliance requirements such as allowable and unallowable costs, procurement procedures, draw-down timing (receiving funds in advance or receiving reimbursements), accounting for capital expenditures, matching funds, and special reporting. Make sure you understand all the requirements associated with a grant before accepting it; you don’t want to have to return the funds because of a misunderstanding in compliance!

Be particularly vigilant for audit requirements. Your Board may already require an annual audit, but if they don’t, you may be offered a grant from a funder who does. If you are already undergoing regular audits, check if your current audit schedule and reporting aligns with the grantor’s requirements. For example, some Boards require an audit every other year, or are fine with an annual review, which does not have the same scope as a full audit. But a big grant may require a full annual audit, which is more expensive and more time-consuming. If you are considering accepting a grant that places this type of compliance requirement on the organization, make sure that the funding will cover the increased costs to the organization, i.e. the cost of the audit engagement, and any additional support from your accounting team to complete the audit and provide the required financial reporting.

Potential for a Single Audit

There is a special type of audit called a single audit, which is required for federal funds expended in one year over $750,000. The $750,000 threshold applies to all combined governmental agency grants, so you need to consider all sources of federal funding in combination, when evaluating for this threshold. Depending on the auditor, a single audit requirement may come with a hefty audit engagement fee. Often, a standard annual audit and a single audit are billed separately. Make sure you understand how your auditor would bill you and what the fees would be for you to take on federal grants. Growing organizations often start with small federal grants under the threshold, get comfortable with those grants, and then end up with a surprise when their grants grow to exceed the threshold and a single audit is required.

Understand the Financial Implications

Grant funds often do not explicitly cover all the additional costs to administer the grant. As discussed, some grants come with audit requirements that increase your organization’s audit engagement fees, but incremental costs also include less obvious expenses like the additional time and research for your accounting team to compile any required reporting, time spent tracking and reviewing program costs, and time spent working with the grantor to maintain a relationship and provide proof that all grant requirements have been fulfilled. Even if your executive director or grant manager is salaried and their time isn’t specifically allocated to programs (though it should be), any extra time they have to spend on grant administration is time that they can’t spend advancing the organization’s mission.

Administrative overhead and audit costs are often overlooked when setting a grant budget. Grant administrators and pass-through administrators try to retain as much of the grant’s administrative budget as possible. To help mitigate the lack of administrative budget at the executing nonprofit’s level, federal grants allow sub-recipients to adopt an optional 10% overhead rule at minimum. Sub-recipients are of course free to negotiate better terms, if possible. This prevents the recipient from absorbing all the grant’s administrative costs from the nonprofit’s general and unrestricted funds, which leaves the nonprofit a little more room for other projects.

Program Cost Allocation

If a nonprofit has multiple programs and funding sources, overhead is allocated according to an allocation method applied consistently each period. This cost allocation plan can be built a few different ways but needs to be approved by any oversight agencies on the nonprofit’s grants and programs. Very frequently, this cost allocation plan is based on the percentage of time that the nonprofit’s personnel actually spends on each program. See How to Allocate Overhead Expenses in a Nonprofit Organization, and How to Use QBO Classes for Your Nonprofit Accounting for more specific information. New programs and grants can affect the proportion of overhead allocated to other programs, so this allocation should be reviewed and possibly adjusted each time a new grant is awarded, or a grant is closed. We recommend reviewing and possibly adjusting the percentages each month or quarter, though annually is fine for organizations with very long and very consistent grants and program projects.

Your nonprofit’s accounting and financial reporting should reflect these program costs, and support any required financial reporting required by your grants. Depending on the assortment of grants and programs held by your organization, and the reporting requirements of your grantors, your annual 990 – which should be reflective of your financial reporting – may reflect certain grants/programs separately and specifically.

Our Mission is to Help You Succeed, Sooner!

As you now know, some grants come with hefty compliance, accounting, audit, and reporting requirements. Although it’s great to grow that expertise in-house, Aldridge Borden | OneSource can provide you with the expertise you need now and support your nonprofit’s accounting and financial reporting. Our experienced nonprofit professionals provide the knowledge, practical applications, and peace of mind you need to grow and succeed in your mission. Contact us to speak with one of our team members.