GRANTS MANAGEMENT

Part 2 – The Grant Proposal Budget – Overview

A version of this article appeared in Blue Avocado in November of 2023

https://blueavocado.org/finance/grant-budgeting/

The CFO is an MVP throughout the grant application cycle. This is especially true when it comes to the grant proposal preparation phase.

During budget preparation, there are a number of general principles to keep in mind.

First, what does the application say the funder wants to see in the proposal budget? The more you can find out about the budget requirements and the review process, the better. The first step is to look for a budget template in the application package that specifies a format that is either required or optional. Example 1 below is a completed budget following a typical format. (Note: The numbers here are based on a project referenced later in this essay.)

Of course, grantmaking institutions vary widely in size, administrative resources, and overall approach to the review process. Your reviewer may be a foundation board member, a United Way volunteer, a seasoned foundation program officer, or an overwhelmed government worker. Regardless of format, then, your objectives should always be clarity, accuracy, and respect for the grantor’s wishes.

How can we learn about those wishes? By studying all application materials, of course, but also by asking. When working with local foundations, a healthy approach to the process is to think of yourself as a potential collaborator. The grantmaker has a mission to fulfill just as you do, and is looking to share their community service goals with the right organization for the right project. Obtaining grant revenue is not a transactional activity like billing a government agency for a sales tax refund; it is about cultivating and building relationships based on mutual trust and respect. This begins at the time of application if not before. Personal contact between funder and applicant/grantee is not always allowed, but many foundations do allow, and may even welcome it. Making a call to ask a question about submission requirements gives you and the funder the opportunity to get to know each other.

Now let’s move on to some strategies and best practices for calculating revenue and expense estimates and for general presentation.

Here are some things to keep in mind:

Estimate Every Cost With Care

We finance-types pride ourselves on our accuracy, but there are two reasons why accuracy is especially important in a grant application. First, the final award will be based largely on your budget estimates. This means you have a fair amount of sway over how much funding your organization ends up receiving. But beware: either too much or too little funding will create headaches later. A budget proposal is not the place to add “cushion” because you run the risk of having to return funding. On the other hand, it is also not the place to skimp. Yes, you want the application to be competitive, but your organization can’t afford to carry out the project if the funding is inadequate.

Second, line items matter. To make sure you have enough funding for all aspects of your programming, you need to be clear about which line each cost will go to. Newcomers to the process might think that as long as they have adequately estimated their overall costs, it doesn’t matter how they are broken down between line items. Wrong! Funders expect their grantees to stick to the budget lines. Many require a budget amendment request to move funding from one line to another, and there is no guarantee the request will be approved.

Both of these reasons demonstrate how integral cost estimation is, and accurate estimates start with a full understanding of the activities that you are aiming to describe with numbers. Of course, the program manager will often provide some of the budget numbers, but the more familiar the CFO is with exactly how the project’s mission will be carried out, the more the CFO can guide the process to the best possible conclusion.

Let’s look at an example: if your project is to perform 30 mental health assessments per month for low-income children, the estimates for computer and telecommunication equipment, office space, and travel cost depend on whether the assessments are done in the office or at the child’s home. A good understanding of the project helps the CFO to integrate all aspects of the budget, from personnel to travel, equipment, office space, supplies, and even postage.

To fine-tune your estimates, consider obtaining price quotes. Checking prices for items like office equipment, furniture, vehicles, contracted services, space rental, and telecommunications is a best practice—even if quotes are not required by the funder.

Use Budget Worksheets

I highly recommend the use of spreadsheet templates for budget calculations. Of course, initial setup requires an investment of time. But as the process drags on and assumptions change, the template will allow you to make revisions quickly without losing accuracy.

Say your project is a homeless outreach program. You are budgeting for three outreach workers and a half-time supervisor. Your costs will be based on 3.5 FTEs (along with other assumptions.) A template that automatically calculates your costs as you change variables such as number of FTEs, travel cost per mile, square footage of office space, etc., will save you time. For this project budget you might design a worksheet that looks something like EXAMPLE 2 below. As your assumptions change you can see instantaneously how the budget line items and the bottom line are affected as your assumptions change.

You will note that “number of months” is one of the variables. In the example we used twelve months, but it usually takes time to get a project off the ground. If you anticipate a three-month delay, say, in hiring staff, your worksheet will give you precision in estimating all of the costs that are based on FTEs. Your worksheet will be valuable throughout the life of the grant as a reminder of how you arrived at your numbers.

Identify Types of Costs

A number of terms can be used to describe types of cost, but not everyone agrees on their definitions. The CFO’s challenge is to identify the definitions that the funder adheres to, and also to characterize costs as “direct” whenever possible.

Generally speaking, the term “direct cost” is understood to mean a cost that can be clearly identified with the activities of a specific program. For example, a preschool program’s direct costs will be teacher salaries, textbooks, supplies, etc.

However, definitions get murkier when we introduce the ideas of “indirect,” “operating,” or “overhead” costs. Again, there are no hard and fast definitions for these three concepts: some funders think of all costs that are not explicitly direct as “operating” costs, whereas others focus on the idea of “indirect” or “overhead” costs which means costs like utilities, insurance, or repairs and maintenance that are shared by multiple programs. These costs are allocated to specific line items on the budget based on some criteria such as square footage, program participants, etc.

In a funder’s mind, operating, indirect, or overhead costs may fall into a lower tier of eligibility for funding since they are perceived to be less essential than direct costs. To be clear, this is by no means a blanket statement; the majority of grant awards do include these costs, but it is still useful to be aware of the perceived distinctions.

I would argue that all costs aside from Management and General (M&G) are direct costs, not operating, not indirect, not overhead. For me, M&G is indirect in the true sense of the word because costs such as human resources, board expense, or payroll processing cannot be spread to the line items on a program budget. M&G appears on the budget as a single amount, usually calculated by multiplying total expense before M&G by a specific percentage. For examples click here.

My recommendation is to seek to avoid the concept of indirect or overhead costs by allocating such costs to direct line items on the budget whenever possible. Again, if you refer back to the completed sample grant proposal budget, all costs are assigned a specific line item description, whether or not the amount represents an allocation of a shared cost. For example, “office space rental” of $6,000 may well be an allocation of a shared cost; I would argue, however, that office space represents an integral part of the program and should be considered direct.

Of course, if you should encounter a grant application that does not fund “operating” or “indirect” costs, you will need to incorporate other sources of funding into the program design.

Pay Attention to Length

For the most part, I’d say try to keep the budget to one page. So how do we keep our budgets succinct, accurate, and comprehensive? Here are some things to keep in mind:

  • Keep the revenue and expense lines somewhat broad. Even if the application includes a budget form, you may have leeway to group expenses. Take an educated guess as to how much detail your busy reviewer needs to see.
  • Avoid the “other” category. The problem with “other” is that it lacks transparency; this will immediately get you off on the wrong foot with the reviewer. Instead, try to find the line item that is the best match for an expense, rather than including it in a group with no description. The same goes for anything you are tempted to categorize as “miscellaneous” or “operating.” (Yet another reason to hate the term “operating.”)
  • Round to even numbers. No matter how hard you work to arrive at sound estimates, you can only achieve a certain level of precision. Rounding to the nearest twenty, fifty, or hundred dollars shows that your numbers are well-thought-out estimates.

If a Budget Narrative is Required be Clear and Accurate

  • Explain the items in the order they appear on the budget.
  • Show your calculations.
  • Check, double check, and triple check to be sure each figure matches the budget to the dollar.
  • Examples of explanations (amounts in bold match the hypothetical budget):
    • Salary – $156,000
      • 3 FTE case managers @$20 per hour for 52 weeks = $124,800
      • .5 FTE supervisor at $30 per hour for 52 weeks= $31,200
    • Fringe benefits @ 30% of salaries = $46,800
    • Telecommunications – $1,680
      • 3 cell phones at $35 per month = $1,260
      • $10 per month allocation of landline for 3.5 phones = $420
    • Travel – $11,600
      • 2 vehicle leases @$300 per month = $7,200
      • Vehicle fuel @$100 per month for two vehicles= 2,400
    • Occupancy – $8,400
      • Rent – 20% of 1,500 square foot office building @ $30,000 per year = $6,000
      • 20% of utilities and maintenance @$12,000 = $2,400

The Budget is an Integral Component of the Grant Application

The application budget communicates the organization’s ability to carry out the project successfully. If the grant is awarded, the numbers will translate to funding dollars and you will collaborate with the grantmaker to carry out your respective missions. The proposal narrative and budget are first steps in building that relationship.

See Part 3 for a deeper dive into the calculation methods that produce a clear and accurate proposal that will stand out in a crowd.