Have you recently received a grant and aren’t sure how to account for it? Perhaps your charity is deciding whether or not to apply for a grant?
This article covers all the key things charities need to know about grant income, and how to correctly account for grant income.
What is grant income?
Grants may be given to a church or charity by the government or other bodies to fund the charity’s work. This might be general funding or specific to a particular activity (known as restricted funding).
For some charities, grant income will be a ‘nice to have’. For others, it will be the main source of income.
Many grantmakers require reporting as a condition of their grant. This can include:
- financial reporting of how you accounted for and spent the money
- impact reporting of how you used the grant for the public benefit
Good fund accounting software, like ExpensePlus, can help you with the financial reporting for grants.
Types of funding
Grant income will either be unrestricted or restricted, which is a key element of fund accounting for charities:
- Unrestricted income can be spent on anything which furthers your charitable objectives, including administrative or overhead costs. This is sometimes called “core” funding.
- Restricted funding carries a restriction and can only be spent in line with this restriction, even if your charitable objectives are wider. Examples of such restrictions might be:
- a certain project, stream of work, or event;
- employment costs for a certain role or team;
- the purchase of new equipment.
If the grant carries restrictions and these were not satisfied (or the costs didn’t amount to the total grant given), grantmakers can request that you return some of the money.
For these reasons, it’s important to account for restricted funding separately. For example by using fund accounting software like ExpensePlus.
Considerations with restricted grants
Cash versus fund balances
One pitfall with any restricted funding (whether grants or donations) is your cash balance versus your fund balance. Just because you have lots of cash in the bank, if most of it is restricted, you can’t spend it on all your charitable activities. It’s therefore really important to track your fund balances as well as your bank balances. Some charities have large sums of money in their bank account(s) but don’t realise that their unrestricted (general) fund has very little money in it.
When you are handling restricted grants, remember to charge all the eligible expenditure to the restricted grant. This means your general (unrestricted) fund only has to support expenditure which your restricted grants can’t cover. As with the majority of charity expenditure, the biggest grant cost is often employment costs. You might have even employed new team members in order to carry out the work funded by the grant.
Indirect costs and full cost recovery
You are likely to have administrative costs associated with any project, but especially if you are paying for staffing. These are also called overheads, indirect costs, or support costs. For example, a project worker’s share of the office utility costs, their staff training, or the cost of their laptop and licences for the software installed, etc.
Can the restricted grant pay for these? Or do your unrestricted funds have to cover these? If permitted in the grantmaker’s criteria, you should always allow for these indirect costs when preparing your grant application.
If your charity relies on grant income as its primary source of income, you should consider Full Cost Recovery. This ensures that your grant income supports the true cost of running your whole organisation. You can read more about Full Cost Recovery from NCVO and Embrace Finance and The National Lottery Community Fund.
What to think about when applying for a grant
Making the application
When deciding whether to apply for a grant, consider whether the requirements of the grantmaker (i.e. what they need you to do if they award the money) are compatible with your charitable objectives. You shouldn’t be undertaking this work if it isn’t. Even if this work is within your charitable objectives, is taking it on going to distract from your ‘bread and butter’? Also, consider the timelines of the application process in tandem with your cash flow requirements. Will the money arrive quickly enough to help with its intended purpose?
When calculating the amount of money to apply for, don’t forget to include:
- your indirect costs of the project; and
- your organisational overheads.
Communication with grantmakers
Once you submit your application, grantmakers are going to do their homework! They will look at your website, your recently filed accounts and trustees’ annual reports on the Charity Commission and maybe Companies House listings. Make sure you have everything up to date and are showing your organisation as best as it can be. During the application process, grantmakers might ask clarifying questions or give you extra forms to fill out. Timely responses will help your application proceed as quickly as possible.
Once you receive the grant, ensure you account for it properly. If you’re an ExpensePlus user, ExpensePlus will help you easily account for and track any grants you receive.
Also, ensure you send in your reports on time, every time, as these may affect your eligibility for future funding.
Extra considerations for multi-year grants
If you’re applying for a multi-year grant, you might also need to consider inflation. If your cost is £50k in year 1, it might be nearer £53k in year 2 and £56k in year 3. Further considerations include:
- What risks are there to your organisation if you secure the grant in the first year but not subsequent years?
- What contracts might you have to enter into to undertake the work?
- Do your trustees fully understand and accept these risks?
In addition, when accounting for multi-year grants, you should accrue for grant income so that it appears in the correct financial year. The International Financial Reporting Standards gives further advice about this.
Grant reporting
Most grantmakers will require reporting on how their money has been spent and the impact it has had. This might be annual, quarterly, or at milestones in the project.
You should check the requirements of reporting before accepting a grant to make sure you have the capacity to deliver this reporting alongside delivering the work. For example, a small grant which requires detailed monthly reporting might cost you more than you realise in administration costs!
Using ExpensePlus to account for grants
ExpensePlus is an accounting software for churches and charities designed with fund accounting at its core. With ExpensePlus, you can easily keep restricted funding separate (without needing to open and manage separate bank accounts).
You can also view reports in real-time. It’s easy to keep track of income, expenditure and remaining balances for each of the different grants you have received, as well as generate reports for your overall charity.
Reports within ExpensePlus are customisable, and drillable. You can give trustees, staff and others in your team access to the reports they need. You can download reports in either PDF or CSV format.
Most organisations set up each of the grants received as a separate fund, but you can also track grants using the Transaction Group functionality in ExpensePlus.
