Managing restricted grants can be challenging. It’s exciting when the funds roll in, but over time, stewarding and recording each transaction and remembering where to report each line item can leave you with a mess to sort out each month. Let us dive into some best practices and discover a few tips and tricks to make tracking these grants a little easier.
What is Restricted Funding?
Restricted funds refer to a reserve of money that can only be used for specific projects or expenses. These funds provide reassurance to donors that their contributions are used in a manner they have chosen. Failure to comply with the noted restrictions or unauthorized use of restricted funds can result in loss of funding.
What’s most important when tracking restricted grants is keeping your records very clear! If a funder has decided to restrict funds, this means they have a specific purpose that they want to see these funds used for. Running a successful nonprofit is heavily dependent on public trust. By stewarding funds as directed, you increase the possibilities to receive additional unrestricted funding in the future. If your accounting process is set up to manage restricted grants from the beginning, then it will simplify the course moving forward and throughout the life of the grant.
Best Practices for Managing Restricted Grants
Make sure to understand each of the restrictions that have been placed on the funding that you have received before tracking. This is to ensure that you enter and track it in the accounting system properly
Record the full grant as income with restrictions and retain grant agreement that outlines in detail the restrictions
Carefully monitor the expenses for each restricted grant separately and make sure the record keeping is pristine
As you spend down on the grant, record and release the amount from that restriction
Ensure that you are using software that is conducive to the organization's operations. This minimizes potential for errors and streamlines both efficiency and effectiveness
This leads us to the Chart of Accounts. The chart of accounts should not be a dumping ground. What I see many organizations doing is adding an account for every single income or expense transaction that an organization has. This is not only confusing to the organization but also for your tax accountant who files your 990. You want to avoid them needing a magnifying glass to try and figure out what goes where because you have packed so much detail on your financial statements.
Reporting needs are different for internal and external users, so accommodate them both at a high level with natural categories in your chart of accounts. For example, let’s say you receive grants from the government. You should have an income account for government grants but each grant should not be an individual line item on the income statement. This crowds the financial statement and can make it very confusing.
If done correctly, what you should expect to see is a quick-pull, efficient view that lets you know exactly where you stand with each account/grant so you can arm your leadership and board with the information they need. With organized data, when you are working with the funder or donor, you can have an easy conversation about where funding has been spent but also where it hasn’t been spent and if those areas should be covered by the grant.
We already know that there is an ongoing argument about overhead expenses and the fact that they aren’t normally taken into consideration when funders or donors restrict funding. One of the things that your nonprofit can do to assist in this argument is to accurately and clearly indicate where funding is being spent, where resources are lacking, and what your organization specifically needs. Having the right team and technology is crucial to this process. At Visionary Accounting Group, we provide you with the accounting team you need to fully manage your finances.