What Are Restricted Grants?

You are probably thinking, “It’s about time you wrote a post on restricted grants!”

We weren’t ignoring you. Really.

Restricted grants are a huge, complicated area. So huge and complicated, in fact, we decided we needed to create a course to cover this topic. Everything from understanding the many different types of grants to learning how to keep track of them in QuickBooks. This course, called Accounting for Restricted Gifts & Grants, is now available in Smart Nonprofit Money. Simply join Smart Nonprofit Money (if you are not a member already), click on Courses and you will see the option for the course.

UNrestricted grants are easy. “Unrestricted” means you can spend the money on anything the organization needs to pursue its mission.

Unrestricted grants, in our experience, are also rare. Most grants we encounter with our clients come with strings attached called “restrictions.”

What Restricted Means

“Restricted” means the grantor gets to tell you what you can and can’t spend the money on. For example, this grant will pay up to certain specified amounts for supplies, staffing and travel for a particular program.

“Restricted” also means the grantor can tell you when you can spend the money. For example, funds are to be spent in the next calendar year. They can also control the “when” part by simply paying out the grant in installments over time instead of all at once.

Grantors sometimes even dictate how you must receive and maintain the funds. (Open a separate bank account, argghhh!)

Terminology alert: A recent update to the accounting standards (ASU 2016-14) now refers to “funds with donor restrictions” and “funds without donor restrictions” instead of restricted and unrestricted funds.

A Common Source of Income

Most of the small to mid-size nonprofits (under $10 million in revenue) we work with receive income from grants.  A grant is simply a gift to the organization. The term “grant” implies several things:

  • The amount is bigger than your typical gift
  • The source is most likely from a private foundation or a governmental entity or agency. Increasingly we are seeing restricted gifts from donor advised funds.
  • You can only spend the grant on certain things and only during a specified time period
  • The grantor requires one or more reports on use of the funds

But grants do not always fit these criteria. Sometimes, as we mentioned, grants are unrestricted. Sometimes grants are quite small. (Sometimes even less than $1,000, and still restricted!)

Sometimes a grant, even if restricted, does not require reporting to the donor. You have to look at the individual grant to determine the nature of the grant and the requirements.

Restricted Grants:  Great? Or Ugh?

A grant is often a significant sum of money. (Great!) Nonprofit leaders do a happy dance because now their program has more funding, at least for a little while.

Also the people who worked to secure the grant feel proud that all the hard work of cultivating the grantor relationship and applying for the grant paid off.

But grants can elicit mixed feelings over their drawbacks, such as…

Poor Grant Timing

Executive directors may feel frustrated if grants arrive the year before they can be spent. How do you explain to the board that all the income came in one year while all the expenses are in the next?

Grant Reporting

Managers feel exasperated because it’s so difficult track how grants are spent, especially if you have multiple grants for the same program. As Vu Le explains (if grant applications were truthfully answered):

How will you monitor and report on this grant’s progress? Because of understaffing, we will continue to run programs while barely holding on by a thread. Then, right before the grant report is due, we will freak out. This will be followed by a round of blame as to who should have been tracking the progress of this grant. Ultimately, we will settle on the decision that Emily, the program director, will do the final report, which includes scrambling to gather evaluation data. We will get it done on time, but barely. We will then make a commitment as a team to talk about improving our grant reporting process so that this does not happen again, but let’s face it, it will always happen again. Please send money so we can buy Emily a gift certificate for a massage so she won’t quit.

Sound familiar?

Little or No Money for Staffing

Nonprofit leaders feel limited because they want to tackle the problems their organizations address, but that takes people. Many grants will not pay (or not pay much) for people.

Or they will pay for wages but not payroll taxes. (Do they want us to ignore IRS requirements and hire employees as contractors?)

Or they will pay some wages and taxes but absolutely no benefits. (Nonprofit staff don’t need health insurance. Or retirement!) Again Vu Le explains:

Summarize your team’s qualification to implement this project: Everyone working on this is qualified. What do you think, we’re just going to take in random people from the streets? Of course not; we save that for the board. The problem is not whether the team’s qualified, but how we can keep qualified people, considering the pathetic rates we pay them. Some have several degrees and/or decades of experience, and barely make minimum wage. Some qualify for our services. Please send money so we can pay our team better.

Amen to that!

We like the concept of pricing programs for funders based on “true program costs.” See this post from Propel Nonprofits for more detail on true program costs.

Think in terms of asking funders to cover the cost it really takes to deliver the programs they want to see happen. But wait…..that takes good accounting and we don’t have enough money to pay for good accounting. What a conundrum!

Requirement for More Money

Getting a grant often means now you need to raise even more money.

That’s right. To carry out the program funded by the grant you have to round up other resources since the grant will only pay for part of the proposed program’s costs. Without other funding you can’t carry out the program. Next thing you know you have nine small grants each paying for a sliver of the program’s costs.

Imagine splitting a program staff person’s wages across nine grants, each with different start and stop dates. (We are not making this up. Now you know why your bookkeeper has bloodshot eyes and wants to strangle the grant writer.)

No Money for “Overhead”

Finally nonprofit leaders continue to scratch their heads over the lack of grant funding for overhead.

We cringe when we hear the word “overhead.” Everyone has a different definition of overhead. (We wrote a post on this topic here). We prefer “management and general expenses” or, even better, “nonprofit infrastructure expenses.”

Despite confusion over what overhead expenses include, everyone knows they have them because restricted grants always fall short of the money that’s really needed.

Grants – the Bane of Our Nonprofit Existence?

We think not, but the solution starts long before the grant is awarded. Or even applied for. As folks in the finance arena, we are often not consulted when it comes to grant planning. And this is unfortunate.

Too often the bookkeeper learns about a grant when the first payment comes in. Then comes the scramble to find out about the grant so it can be recorded properly and managed going forward. Often no consideration is given to how grants will be tracked or for the complexity of tracking multiple grants.

Because there is little uniformity among grants, they can be quite time consuming to apply for and manage.

One organization we worked with started out years ago receiving $5,000 grants from various local foundations. The organization grew, but the size of the grants did not. Eventually it became too much hassle to divvy up program expenses among many small grants.

The solution?  Well, you can ask for bigger grants for starters. Search out new funders that mesh better with the organization’s increased size. Also be willing to drop funders for whom the administration is more trouble than it’s worth.

Accounting Truths

Here are two truths that nonprofit leaders need to remember:

Truth #1 –  Accounting is not free.

Truth #2 –  Accounting staff do not have unlimited capacity.

Administering restricted grants can be expensive. It drives up the cost of finance help and soaks up finance staff capacity. At some point you may even experience a breakdown of processes (not to mention people!) because the demands of accounting for so many grants outstrips the finance staff’s ability to manage them. (We have actually seen this happen.)

Finance people generally hate to complain. They have a hard time explaining why they are not able to deliver. It’s so complicated. How can a non-finance person possibly understand?! They heroically try to shoulder the ever increasing burden of tracking and reporting on restricted grants, often without knowing how to do so properly and efficiently.

The result is errors and burnout. The organization becomes constrained in its ability to grow. At worst, maxed out staff can result in embarrassing errors such as applying the same expenses to two or more grants or spending funds for unallowable purposes. (Yes, we have seen these things happen, too.)

Managing Restricted Grants

Your bookkeeper and everyone else who bears responsibility for keeping track of restricted gifts and grants needs good communication about these gifts. Work with Finance staff right from the beginning in developing the grant budget. Finance staff may even be able to help you craft a budget that captures more expenses.

Once the grant is awarded, provide the bookkeeper and anyone else who needs to be “in the loop” all the basic information about the grant. This information should include all relevant information such as

  • Name of the grantor
  • Identifying information about the grant such as a grant number
  • Gift amount
  • Gift date
  • Timing of grant payments, if not paid 100% up front
  • Start and stop dates for spending the grant
  • Restricted purpose
  • Grant budget
  • Unallowable expenses
  • Matching requirement or other conditions that must be satisfied to receive the funds
  • Reporting requirements including report due dates

And any other pertinent information about the grant.

Often much of the necessary up front information can be found in the award letter and the grant proposal budget that was accepted by the funder.

After the initial gift, your bookkeeper will need to know which expenditures can be charged against the grant. We say “expenditures” instead of “expenses” because grants sometimes cover things that are not expenses such as fixed asset purchases.  Lack of communication to the bookkeeper has caused much wasted time going back to find expenses that should have been charged to grants!

Restricted funds are required by Generally Accepted Accounting Principles to be used first before unrestricted funds. This requirement does not change the amount of cash you hold. It only removes the restrictions on cash you hold. Your organization is stronger with more unrestricted cash and less restricted cash, so be sure to apply all allowable expenditures to your grants.

Sustainable Funding

Even better than including finance staff in discussions about grants is having a broader discussion about sustainable funding. Tunnel vision on small grants might be part of what is holding your organization back.

Ask questions. What other funding sources can you develop and manage successfully? What percentage of funds do you want to come from restricted grants? Can you find unrestricted grants? Can you make a case to funders to cover the full price of the programs you deliver?

When it comes to restricted grants in your nonprofit organization, what do you think?  Great or ugh?

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