9 min read
November 6th, 2024
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Nonprofit organizations face many funding challenges. First and foremost, simply obtaining enough funding to operate and carry out programs is an enormous barrier.
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Key Takeaways
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Once funds have been secured, more challenges arise, particularly with the management, reporting, and use of those funds – all of which must be carried out compliantly, responsibly, and transparently.
Nonprofit funding falls into several categories of gifts, and one of the more complicated (yet exceptionally beneficial and valuable) types is multi-year funding. Multi-year funding can include grants, gifts, and pledges that extend over a financial period of more than one fiscal year. They offer significant benefits such as reliable funding, time saved on fundraising, and the ability to execute long-term projects without worrying about future funding. Despite its many accolades, multi-year funding can present challenges to nonprofit organizations.
The Challenges of Multi-Year Funding for Nonprofits
The complexities of multi-year funding are mainly related to the bookkeeping and accounting requirements of recording the funds in addition to the subsequent effects that arise in the nonprofit’s financial reports.
Identifying When to Recognize Revenue: Restricted vs. Unrestricted Funds
The first challenge is in understanding when to record the revenue from a multi-year grant or pledge. To maintain compliance and proper financial statements, nonprofit organizations must recognize revenue (record the revenue) at the right time. The primary difference in the timing of recognizing revenue depends on whether the funds are categorized as unrestricted or restricted.
While there can be some nuances to the rule, generally, unrestricted funds should be recorded as they are awarded or pledged. Revenue recognition of restricted funds can be handled differently. Revenue recognition of restricted funds depends on whether the restrictions are conditional or unconditional. With respect to conditional funds, revenue is not typically recognized until the nonprofit meets the conditions specified by the grant terms. With respect to unconditional restricted funds, revenue is recognized as soon as the nonprofit organization receives them or has the right to receive them.
Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?
The Apparent Budget Deficit: Further Challenges With Unrestricted, Multi-Year Grants and Pledges
When looking at an organization’s annual financial activity, multi-year funds can be misleading. Unrestricted multi-year funds create an apparent budget deficit because their total revenue is recognized when the grant commitment or pledge is made with the expenses not occurring until future years (when the revenue no longer appears in the financial reports).
As a result, an organization operating with multi-year funds will show a major budget surplus in the fiscal year when the commitment is made, and then it will show budget deficits in the following fiscal periods.
It is up to the executive director to be prepared to explain apparent budget deficits that arise as a result of multi-year funds, communicate from a multi-year perspective, and present clear information regarding the actual financial health of the nonprofit to its board of directors.
How to Manage Multi-Year Funding in Nonprofits (6 Essential Tips)
1. Use the Accrual Accounting Method
The accrual accounting method is required for compliance with the standards outlined in the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board (FASB). Following this set of accounting principles and standards ensures financial compliance in your organization.
One of the primary differences between the accrual accounting method and the alternative (cash accounting) is that accrual accounting requires revenue to be recognized when it is earned – not when it is received. This requirement of accrual accounting is in accordance with the need to recognize multi-year grant revenue when it is awarded, instead of when it is received. Using accrual accounting will help ensure that your organization compliantly recognizes revenue at the right time.
Read More: The Future of Nonprofit Fundraising: Trends and Predictions
2. Use Fund Accounting
Fund accounting is essential for the proper separation, management, and reporting of restricted and unrestricted funds in nonprofit organizations. Fund accounting is the number-one recommended approach to accounting for nonprofit organizations because its structure is designed specifically to meet the needs of nonprofits with regard to tracking separate pools of funds in addition to their separate schedules or timelines, requirements, restrictions, and budgets. Fund accounting will help you keep track of your multi-year funds and simplify the process of generating clear financial reports for your nonprofit board.
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3. Prepare a Monthly Grant Period Report
When it comes to handling multi-year funds in your nonprofit, transparency and board education are vital, and a monthly grant period report can help you accomplish both of these objectives.
A monthly grant period report should be created at the very beginning of your grant, and it should look at each month of the entire grant period. Starting with your grant’s approval date, create a financial schedule, month by month, outlining both income and expenses for every month until the grant period’s ending date.
For the end of each fiscal year, total the monthly reports so that you can provide an accounting of the multi-year fund’s impact on the overall budget surplus and deficit for the fiscal year. It’s important to remember that your grant period could extend across several fiscal years. For example, if a three-year grant period begins in the middle of a fiscal year, it will then impact a total of five fiscal years in your nonprofit.
In addition to looking at the monthly reports’ impact on your annual budget, you can also use it to track spending and progress on a more frequent basis. Pull monthly budgets from your multi-year financial schedule and generate actual reports for comparison. This not only helps you communicate the nonprofit’s activities to the board throughout the year, but it will also help keep your program directors on track and on budget.
4. Include a Multi-Year Annual Financial Impact Report in the Budget
One challenge with multi-year funds is the apparent budget deficit that will appear on future annual budgets. These deficits are misleading, especially to board members without expansive accounting backgrounds. So, it can be difficult for a board of directors to get behind approving a nonprofit budget that reflects a deficit if they do not understand that funds are actually available to cover the “deficit.”
Use your monthly grant period financial schedule to generate a multi-year report that shows annual financial information from a long-term perspective. This report can include a statement regarding the purpose of the grant and its related financial impact statements. Be sure to include projections regarding the grant’s total benefit to the nonprofit.
Provide annual totals regarding the impact on past, present, and future fiscal years by using your monthly grant period schedule. Separate the monthly data by fiscal year and then total it to provide annual summaries to the board. Directors can then reference this multi-year report to see the anticipated net effect of a multi-year grant on each relevant fiscal year. This report will show your planned deficit and outline where the money for covering this deficit will come from.
Read More: 7 Management And Board Reports Nonprofits Should Be Looking At
Instead of dialing in on a single year of your activity, this multi-year perspective provides awareness regarding the multi-year fund’s total impact and the organization’s long-term plans (beyond an individual fiscal year).
5. Include an Accrual to Cash Reconciliation in the Budget
Seeing a negative number at the bottom of a budget can still be frightening and concerning for nonprofit board members. To put your board at ease, you can also include an “accrual to cash” reconciliation at the bottom of your organization’s statement of financial activity. This quick addendum tacks on numerical information regarding the cash flow activity associated with multi-year funds that were earned and recognized during a previous fiscal year.
Your nonprofit’s net assets are listed at the bottom of your statement of financial activity. Below this line, you can add on the grant revenue (recognized in prior years) that was used during the current month. For additional clarity, subtract any grant revenue that was received in the current month but that won’t be used until a future financial period. The total equals your organization’s adjusted net assets, displaying your profit or loss after reflecting the impact of multi-year funds.
6. Satisfy Differing Rules and Regulations
Nonprofits operating in the United States and accounting for domestic funds are generally considered compliant when following GAAP standards. However, it’s important to remember that a nonprofit operating in another country or receiving international funds might be subject to separate sets of rules and regulations.
To maintain compliance in these cases, the nonprofit organization should maintain multiple sets of records that adhere to any relevant set of rules, regulations, and accounting standards. This type of accounting can be quite complex, and an organization will benefit greatly from operating with an accounting system, such as Sage Intacct for nonprofits, that can handle fund accounting, quickly consolidate currencies, and accommodate dual books.
Outsourced Expertise in Navigating Nonprofit Funding Over Multiple Years
Navigating multi-year funding in a nonprofit can be complex, and communicating the true financial health of your organization to the nonprofit board is essential to ensure they provide sound advice and you maintain a healthy collaboration. Plus, as your organization grows, you’ll need to track more and more funds, categories, and multi-year grants or pledges. The back office of a nonprofit is complicated, and that of a growing nonprofit becomes increasingly complex. Thankfully, outsourced accounting services provide a comprehensive, effective, and affordable solution to nonprofit financial management.
Outsourcing your nonprofit’s back office to nonprofit accounting experts can ensure your organization operates compliantly and transparently while providing essential (and easy-to-understand) financial reports for your board of directors. While improving your reporting and compliance, outsourced accountants can also help you maximize the ROI of the funds you receive – no matter what category they fall into – to continue strengthening and expanding your mission.
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