GRANTS MANAGEMENT
Part 1 — The CFO’s Role in the Grants Game
A version of this article appeared in Blue Avocado in January of 2024
Most nonprofits strive to include grant funding in their revenue streams but often find that large amounts of time and know-how are needed. The grant writing team does not always realize that the CFO has much to contribute to the success of the grant application and the administrative processes that follow.
The grant application usually begins with the detailed conceptualization of the project, followed by the creation of a budget and narrative. The CFO’s full involvement in every step of this process benefits everyone. As CFO, you need to be at the planning meetings—not to meddle in the program design but to provide insights into the financial impact of the decisions.
Here are three areas in which the CFO adds value:
- Management and General
- Shared cost allocations and avoiding double dipping
- The impact of program design and financial reporting.
Management and General
Before the decision is made to go for the grant, the team should determine how Management and General (M&G, also known as administrative overhead—i.e. human resources, accounting, information technology, etc.) will be handled in the application.
On most application budgets M&G is the last line item and is calculated by multiplying the organization-wide M&G rate by the project’s total expense. To get the organization’s M&G rate, we divide the total M&G cost by total expenses before M&G. For example, a nonprofit with M&G expense of $200,000 and $1 million in total expenses before M&G will have an M&G rate of 20%. In an ideal world, the M&G rate used on the grant application budget would then be 20%–that’s $20,000 for a $100,000 project.
The M&G rate varies across organizations depending on their cost structure. While an M&G rate of 20% is not atypical, some funders impose a cap on M&G. In fact, this cap could be as low as 5%-10%, which is almost sure to be lower than the organizations’ actual M&G rate.
So what does this mean in terms of the budget? Well, if the M&G rate is capped at 10% but your organization’s rate is 20%, only half of the project’s M&G will be funded if the application is successful. This means the other half will show as a deficit on the income statement and will have to be covered by another source of funding.
An inexperienced grant writer might say: Oh well, the other programs will just have to absorb the unfunded M&G. Not so! Organization-wide, M&G cost must be allocated to each program according to its size whether or not there is funding to cover it. Unfunded M&G cannot be given to other programs. Government funders would consider this to be fraud for sure and private funders would consider it highly unethical at the least. In short, no funder is willing to pay for more than its fair share of M&G.
M&G is not a problem to be solved after the proposal has been submitted and approved. The CFO’s task, then, is to remind the grant writers—preferably on the record—that M&G cost must be funded (perhaps via donations or some other revenue stream) unless the executives and the board are willing to live with deficits.
Shared Cost Allocations and Avoiding Double Dipping
Grant projects often seek funding for a needed expansion or enhancement of an existing program. This can allow programs to share costs, increasing efficiency. The CFO’s challenge is to assure that costs are allocated between programs in a way that makes sense but also avoids double dipping which occurs when multiple reimbursement requests are made for the same expense.
This means that if grant writers are looking to the new program to alleviate existing deficits, they must be aware of two requirements: First, only legitimate shared costs can be reclassified from the old program to the new program, and second, they can only be reclassified to the extent that those costs are not already covered by another funder. The CFO’s role here is to make sure that allocation methods both maximize funding and stand up to auditors’ scrutiny.
Let’s look at an example. Say you provide housing and supports for runaway teenagers with a single funding source (FS1), but you have identified an additional need to serve teenage mothers and their babies, so you are now applying to a second funding source (FS2).
The original program has six case managers and the additional services require three. However, the new case managers will report to the existing program supervisor. (For the sake of simplicity, we will assume for the moment that the supervisor’s compensation remains unchanged.)
In this instance, the cost of the supervisor’s salary and fringe must be allocated between both the FS1 and FS2 cost centers, probably based on full time equivalent staff (FTES). Since there are six case managers in the original program and three in the proposed program, two-thirds of the supervisor’s salary and fringe will remain in FS1 and one-third will go to FS2.
Let’s say the amount to be allocated from FS1 to FS2 is $25,000 but FS1’s deficit is only $10,000. If and when the grant is approved, the allocation will result in a surplus of $15,000 in FS1, and that funding will have to be returned—an undesirable outcome for both the grantor and grantee!
Shell games such as this must be considered during the application planning stage. If the CFO can see that there is a risk of double dipping they might ask the question: If sharing costs results in a surplus in the original program, is new funding needed?
In this example, funding for the cost of the new case managers is needed. But at the same time, the temptation to bypass the inconvenience of allocating the program supervisor’s cost must be resisted. If we accept that the cost must be allocated, perhaps the allocation would free up FS1 funding to cover an unmet need in the original program, such as equipment replacements or a software upgrade for tracking outcomes.
In this scenario, a conversation with the FS1 program officer would be warranted, and they might even be happy to approve a budget amendment that will improve service as a result of the additional support.
A final note on this topic: In this example the supervisor might be due a salary increase with the additional workload, depending on circumstances. There are so many possible scenarios here that I will leave it to our hypothetical CFO to devise a strategy for utilizing the FS1 and FS2 and/or other funding to make that happen if it is warranted.
The Impact of Program Design on Financial Reporting
GAAP (generally accepted accounting principles) has a lot to say about how and when grant revenue is reported on the audited financial statements. Of course, these rules are probably far away from the grant writer’s mind, but the CFO knows that the project’s design will have an impact on the financial reports that the board and the public see.
The GAAP revenue recognition rules dictate the timing of when grant revenue is recorded in the books and recognized on the income statement. Depending on how the project and grant application are structured, this revenue will be labeled as either unconditional or conditional.
Unconditional grant revenue is recorded and recognized on the income statement upon notification of the award (even if it is a multi-year project) whereas conditional funding is recognized as the expenses are incurred. Conditional funding is usually preferable because the revenue directly matches the expense on the income statement.
In contrast, unconditional funding is recognized all at once: it is recorded in the books and appears on the financial statements in the year that it was awarded. In this case, no revenue is recorded in subsequent years regardless of when expenses are incurred.
A grant will be considered conditional if milestones or metrics (such as a required number of meals to be served, students registered for summer camp, or number of mental health assessments conducted) are included in the application and subsequently appear in the contract. If metrics (or other less commonly encountered criteria) are absent from the application, the funding will probably be considered unconditional and will be recognized upon award of the contract.
Grant revenue recognition is a challenging area; CFOs often need to ask the auditors for help in applying the GAAP rules correctly. You most definitely do not want to drag the team down this road unnecessarily. But on the other hand, if you (and your auditor if you choose to consult with them) suspect that issues may pop up when it comes time to report revenues and expenses, then consider introducing these concepts to the team early on. You may be able to head off future headaches (like years of income statements showing expenses with no matching revenue) by simply suggesting that metrics or other milestones be included in the project design.
The CFO is a Valuable Resource in the Grants Game
The CFO is so much more than “just one more person to check in with” before sending off a grant application. Ideally, the CFO should both guide the development of the grant budget and offer input relating to the management of funding after it is awarded. The CFO’s unique combination of knowledge and experience is a critical ingredient in a successful grant application and fully funded project.