For non-profit organizations, grants and contracts are often lifelines that enable the fulfillment of their mission. However, managing these funds comes with the critical responsibility of ensuring that every dollar is tracked and reported accurately. Proper project expense tracking is essential not only for maintaining compliance but also for fostering trust with funders and positioning your organization for future funding opportunities.
In this post, we’ll explore some best practices to help your non-profit manage grants and contracts more effectively through precise expense tracking.
1. Establish a Detailed Project Budget
The foundation of good project expense tracking starts with a well-defined budget. Every grant or contract you receive should come with a budget that outlines how the funds will be allocated across different categories—such as personnel costs, supplies, equipment, and administrative overhead. This allows you to clearly track expenses according to the approved budget and ensures that spending stays within the allowable limits.
Key Steps in Setting Up a Budget:
- Break Down Costs by Categories: Create specific line items for every expected expense category.
- Allocate Costs by Period: For multi-year grants or contracts, allocate your budget by fiscal year or reporting period.
- Include Indirect Costs: If the grant allows for indirect costs (overhead), make sure to account for these appropriately in your budget.
2. Use a Dedicated Project Tracking System
Using the right tools is critical to effective expense management. A robust accounting system that supports project-based tracking will allow you to separate costs associated with different grants, contracts, or programs. QuickBooks Online, for example, offers a “Projects” feature that enables you to track income and expenses by project, helping to manage each grant and contract independently.
Benefits of Project Tracking Software:
- Improved Accuracy: Automatically categorize expenses, reducing the chance for manual errors.
- Easy Reporting: Generate project-specific reports for grantors and funders, simplifying compliance.
- Visibility: Gain insights into project spending in real-time, helping to prevent overspending or underutilization of funds.
Tip: If your accounting system doesn’t have a project-tracking feature, consider setting up separate accounts or classes for each project to track expenses manually.
3. Document Every Expense Thoroughly
Non-profits must keep meticulous records of every expense incurred under a grant or contract. This is essential for both internal tracking and external audits by funders or government agencies. Every transaction should be backed by documentation that ties the expense directly to the project it supports.
What to Document:
- Receipts and Invoices: Retain all receipts and invoices related to the project.
- Time Sheets: For personnel expenses, time tracking should reflect the actual time staff spend working on the project.
- Expense Allocations: If costs like utilities or rent are split between different programs, make sure the allocation method is reasonable and documented.
Tip: Use digital tools to store and organize all supporting documents for easy access during audits or grant reporting periods.
4. Track Matching Contributions and In-Kind Donations
Some grants, particularly government or large institutional grants, may require matching contributions. These can include cash donations, in-kind donations, or volunteer services. Tracking these contributions is crucial for compliance and for demonstrating to funders that you’ve met the matching requirements.
Best Practices for Tracking Matching Contributions:
- Assign a Value to In-Kind Donations: Ensure that all donated goods or services have a reasonable fair market value attached.
- Track Volunteer Hours: Keep a log of volunteer hours and assign a value to the time they contribute to your project.
- Report Contributions in Line with Grant Guidelines: Review the funder’s guidelines for reporting match contributions and make sure you track them in a way that aligns with these rules.
5. Conduct Regular Internal Audits
A critical element of ensuring proper project expense tracking is conducting internal audits before submitting reports to funders. By reviewing the project’s financials internally, you can catch discrepancies, non-allowable expenses, or budget variances early and correct them before they become issues during an external audit.
Steps for an Internal Audit:
- Review Expense Reports: Compare actual expenses against the budgeted amounts for each category.
- Check for Unallowable Costs: Ensure that only allowable costs are charged to the grant or contract.
- Prepare for Fund Audits: Confirm that all documentation is in order and accessible, including receipts, timesheets, and invoices.
6. Maintain Clear Communication with Funders
One of the best ways to ensure that your non-profit remains compliant with grant and contract requirements is to maintain open lines of communication with your funders. If project costs shift or new expenses arise that were not originally budgeted, proactively reach out to discuss potential budget modifications. This can help you avoid non-compliance and ensure that the funder is on board with any necessary changes.
7. Regularly Monitor Your Cash Flow
Grants and contracts often come with payment schedules that may not align with your project’s cash flow needs. Some funders disburse funds up front, while others reimburse expenses after the fact. Ensuring that your organization has enough liquidity to cover costs while waiting for grant disbursements is key to keeping your project on track.
How to Manage Cash Flow:
- Track Receivables: Monitor when payments from funders are due to ensure your non-profit doesn’t experience cash shortages.
- Build Reserves: If possible, build a reserve fund to cover project costs during periods when reimbursements are delayed.
- Use Cash Flow Projections: Regularly update cash flow projections based on anticipated payments and project expenses to avoid surprises.
8. Submit Accurate and Timely Reports
One of the most important responsibilities when managing grants or contracts is ensuring that you submit accurate and timely financial reports. Funders often have specific formats and deadlines for reporting, and missing these can jeopardize future funding.
Best Practices for Reporting:
- Adhere to Funders’ Guidelines: Review the reporting requirements at the beginning of the grant period and ensure you have the systems in place to meet them.
- Provide Narrative Justifications: If there are variances between the budgeted and actual expenses, include clear explanations for the differences.
- Submit on Time: Develop a schedule for reporting that allows for internal review before submission.
Final Thoughts
Effective tracking of project expenses is essential for ensuring that your non-profit remains compliant with grant and contract requirements while maximizing the impact of the funding you receive. By implementing these best practices, you’ll not only streamline your internal processes but also strengthen relationships with funders, paving the way for future support.
At Bookkeeping Barn, we specialize in helping non-profits manage their financial reporting and compliance needs. If your organization needs assistance with tracking project expenses or navigating grant requirements, contact us today to learn more about how we can support your mission.
