Grants are a critical source of funding for nonprofits but managing them requires care. Mistakes in accounting can lead to audits, penalties, or even loss of funding. To protect their organization and reputation, nonprofits must address these four common mistakes.
Mistake 1: Not Tracking Grant Restrictions
Many grants come with rules, or restrictions, about how to use the funds. For example, the grant may only fund a specific program, have a certain date to spend the money, or limit spending to certain expenses like staff salaries or supplies.
Why This Happens
Nonprofits sometimes don’t separate restricted funds from unrestricted funds. Staff might misunderstand the rules or overlook them during spending.
What Can Go Wrong
Misusing restricted funds can have serious consequences. Funders may demand repayment, cut off future funding, or report the nonprofit to regulatory authorities.
How to Fix This
Use Proper Accounting Tools: Nonprofit accounting systems like Cloud Books 365 can separate restricted and unrestricted funds.
Document All Restrictions: Create a record of each grant’s rules and share it with key staff.
Regular Reviews: Perform monthly or quarterly checks to confirm spending matches the grant’s terms.
Tracking restrictions not only ensures compliance but also helps build trust with funders.
Mistake 2: Poor Documentation of Expenses
Accurate documentation is crucial for grant compliance. Nonprofits must keep records to support spending related to grant funds. Without these, it’s hard to prove funds were used correctly.
Why This Happens
Some nonprofits don’t have a clear system for tracking expenses. Staff may forget to save receipts or mislabel costs. Limited time and resources can make this worse.
What Can Go Wrong
Missing or unclear records can lead to audits or the loss of future funding. If a funder doubts the nonprofit’s ability to manage money, they may hesitate to give more grants.
How to Fix This
Create Clear Processes: Develop simple steps for staff to follow when recording expenses, like keeping copies of all receipts and labeling them clearly.
Invest in Technology: Grant management tools can automate documentation and reduce mistakes.
Train Your Team: Host training sessions to teach staff how to document expenses.
By keeping good records, nonprofits can avoid problems and focus on achieving their goals.
Mistake 3: Mismanaging Indirect Costs
Indirect costs include expenses like rent, utilities, and office supplies. These costs are shared across programs but are not tied to a particular grant. Managing them can be a challenge.
Why This Happens
Nonprofits may not have an approved system for dividing these costs between many grants. Others may guess at amounts instead of using a consistent method.
What Can Go Wrong
Incorrectly allocating indirect costs can result in funders asking for money back. It might also lead to underfunding certain programs, creating gaps in operations.
How to Fix This
Set an Indirect Cost Rate: Apply for a federally negotiated indirect cost rate (NICRA) if your nonprofit qualifies. This ensures a fair and consistent way to allocate costs.
Follow a Clear Method: Use a formula based on time, space, or usage to divide costs among grants.
Check with Funders: If you’re unsure what indirect costs are allowed, contact the funder to clarify.
Managing indirect costs helps nonprofits avoid errors while covering their operational needs.
Mistake 4: Late or Inaccurate Reporting
Grant reports are key to showing funders how their money was used. These reports include financial details, program updates, and proof of compliance with grant terms. Missing deadlines or submitting incorrect reports can hurt the nonprofit’s reputation.
Why This Happens
Nonprofits often have limited staff to handle the reporting process. The complexity of combining program data and financial details can lead to delays or errors.
What Can Go Wrong
Late or incomplete reports may result in funding cuts or suspension. Funders might also lose confidence in the nonprofit’s ability to manage grants.
How to Fix This
Set Internal Deadlines: Plan to finish reports a week or more before the funder’s deadline. This allows time to double-check accuracy.
Use Reporting Tools: Software like Cloud Books 365 can automate parts of the reporting process.
Assign a Reporting Specialist: Have one person or team responsible for gathering data and preparing reports. This reduces confusion and speeds up the process.
Meeting deadlines and submitting accurate reports shows funders that their money is in good hands.
Conclusion
Accounting for grants isn’t always easy, but nonprofits can avoid major problems by planning ahead. Tracking restrictions, documenting expenses, managing indirect costs, and submitting timely reports are essential steps.
By investing in the right tools and training, nonprofits can reduce errors and build strong relationships with funders. These efforts protect the organization and ensure its focus remains on the mission.
