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Multi-year grants with unrestricted funds are incredibly valuable to nonprofits because they provide money upfront which allows for the confident hiring of staff and executing of program objectives.
A multi-year grant supports stability and takes away the uncertainty of nonprofit funding and cash flow which allows a program to focus on delivering services that further the mission. Additionally, multi-year grants look good and can strengthen an organization's reputation, helping them secure additional funding. They also reduce the total time that nonprofit leaders spend researching, applying for and reporting on additional grant funding sources.
Unfortunately, multi-year grants also create havoc when the board tries to look at financial activity one year at a time. This difficulty with multi-year grants occurs because the grant's total revenue gets recorded at the time when the multi-year grant's commitment is made. However, the expenses occur in future years when the related revenue is not reflected in the financial reports.
Is There a Simple Solution to Multi-Year Grant Reporting Challenges?
The short-form solution to multi-year grant problems is looking at multi-year financial activity when dealing with multi-year grants. So, instead of preparing financial reporting schedules based on the year, you prepare financial reporting schedules based on the life of the grant to direct attention away from the impact of a multi-year grant on any single year's budget.
While this solution to multi-year grant reporting is simple, it's not without its own complexities.
For example, a nonprofit's fiscal year rarely lines up with the granting period, and this can lead to reporting complications in the years after receiving approval for multi-year grants. Since the full amount of a multi-year grant is recorded as income when formal grant approval is received, the funding looks like a budget surplus in the year of approval. However, the grant funds will not appear in the budgets for the years that follow, and this could create a budget deficit.
Getting the Board of Directors on Board With a Budget "Deficit"
Seeing a deficit (of any kind) on the budget can be startling, and deficits tend to scare board members who don’t understand the difference between accrual-basis and cash-basis accounting methods. Although the budget deficit looks frightening, with a multi-year grant the nonprofit gets the cash upfront, which is much more desirable.
So, you need to educate the board to make sure they are comfortable with what looks like a "deficit." This means explaining how the numbers work across the two years. You can use a three-step process designed to provide multi-year grant reporting, along with monthly accrual to cash reconciliations.
Step 1 - Prepare the Monthly Grant Period Report
First, prepare a financial schedule of the usage of the grant, by month, for the entire grant period (GP). This will help the board understand how the numbers work by detailing the income and expenses on a monthly basis. This will let you enter a monthly budget for the grant in your accounting system. Then you can prepare monthly budget vs. actual reports for the grant to make sure the program manager has the data at their fingertips and can use it to stay on schedule.
To prepare a report by Grant Period (GP), set up a monthly schedule that starts with the approval date of the grant and finishes at the end of the GP. Then, total the monthly schedule at the end of your organization’s fiscal year so you can show the surplus and deficit impact of the grant on each individual fiscal year.
Keep in mind that when a multi-year grant's GP has a delayed start, it can cover a lot of fiscal years. For example, a three-year grant could easily impact five fiscal year budgets:
- Year One: A nonprofit receives approval for a new three-year grant. Revenue is recognized as the entire grant amount in year one.
- Year Two: The GP begins in the middle of the fiscal year.
- Years Three and Four: The GP continues.
- Year Five: The GP ends mid-fiscal year.
Most grant applications require the submission of a detailed budget showing the expected usage of the grant funds. If the development team works closely with your accounting team, that document can be used as an excellent starting point for preparing a GP schedule.
Step 2 - Present the Multi-Year Annual Financial Impact
The next step is to present annual financial information from a multi-year perspective. You can do this by including the multi-year grant purpose and financial impact statements in your budget while also highlighting the expected total impact of the grant and benefit to the organization.
Show how the multi-year grant has impacted and will impact the annual total for past and future fiscal years by creating an annual total of the monthly GP report outlined in the first step. This annual summary will show the board the net effect on each fiscal year so they understand that any future deficit is planned and where the cash will come from.
This is important because asking the board for approval of a single-year budget with a deficit will lead you into a difficult board discussion you want to be prepared for. With this step, you have an answer if you present the current year's proposed budget paired with the actual historical results from the prior year(s).
Using multi-year messaging focuses the board's awareness on the total impact, preventing too much attention from focusing on a single budget year. This multi-year approach should not only be used for multi-year grants but for other unusual funding and revenue sources such as large, one-time donor gifts, estate gifts realized from planned giving efforts, capital campaigns, membership pledges, or any type of gift that covers more than one fiscal year.
Step 3 - Reconcile Accrual to Cash Each Month
To help the board see the true impact of a multi-year grant, GrowthForce suggests an “accrual to cash” reconciliation at the bottom of the Statement of Financial Activity. This is designed to show the board the monthly cash flow impact that was earned/received in a prior year.
This simple reconciliation shows the following:
= Net Assets (bottom line on Statement of Financial Activity)
+ Grant Revenue from prior years used in the current month
- Grant Revenue received this month that will be used in future months
= Adjusted Net Assets - profit or loss adjusted for the impact of multi-year revenue
With this breakdown, the board can look at the bottom line each month and know the organization is being fiscally responsible. This reconciliation provided at the bottom of the income statement shows the board where the funding is coming from to pay for program expenses that would otherwise appear to have no funding.
Get Out There and Go After Multi-Year, Unrestricted Funding
Unrestricted funds that are available over multiple years to a nonprofit are the ultimate funding source, so no nonprofit organization should shy away from these types of grants due to the reporting complications they can present. Instead, follow the simple steps above to ensure your board of directors fully appreciates the benefits of these types of grants while understanding that the budget deficits they create are not true deficits.
- Unrestricted multi-year grants are extremely valuable.
- Money comes in advance and provides program stability.
- You know you can make payroll for multiple years as long as the accounting and cash management are done right.
- Multi-year grants can look like budget deficits as a result of the accrual accounting method.
- Deficits make boards nervous.
- This approach helps them see why the books are balanced, even though the Generally Accepted Accounting Principles (GAAP) might make it look like the nonprofit has surpluses and deficits.