501(C)(3) Nonprofit’s Guide To

Leveraging Federal Grants

While all organizations should diversify their revenue streams with different funding sources, it makes sense that nonprofits put so much effort into securing federal money. While the median largest award secured from a community foundation was around $10,000 in 2019, the median largest award from the federal government was over 40 times that amount, around $425,000.

These smaller grants from independent and community foundations are slightly easier to win. But chasing after a highly competitive federal grant — and winning it — could dramatically increase an organization’s overall funding. And huge increases in funding allow nonprofits to dream big when it comes to the work they can do to further their missions.

Unfortunately, these large sums of money come with a tradeoff. Federal funding requires opening your organization  — or more specifically your general ledger — up to large amounts of scrutiny from auditors.

To prepare for an inevitable audit, your nonprofit will have to become extremely organized. You’ll have to create plans and processes that will help you stick to the budget you proposed in your grant application. And you’ll likely need to invest in and implement various types of software and tools — largely for accounting, time tracking, and grant management — if you haven’t already.

But even with all of the preparation, changes, and overall hassle that comes with federal funding, the chance at hundreds of thousands of dollars in grant money is often too appealing to turn away from.

If you’re thinking of going after a federal grant — or are worrying about managing one you’ve already secured — you can take a deep breath. We’ve created this guide to help nonprofits like yours not only manage federal awards, but also leverage your funding effectively. From application to audit, use this guide to help your organization navigate federal funding.

Planning to purchase more materials and supplies with your new funding will be relatively simple. But acquiring more talent and manpower to help meet your grant objectives is a less straightforward process. And while you’ve dedicated a certain amount of your funding to program payroll, you’ll have to ask yourself several important questions:

• Will you be able to sustain this level of staffing if or when you stop receiving grant funding?
• Should you hire full-time, permanent staff to run your program, or should you take on temporary or part-time staff and contractors?
• How can you plan ahead to keep your nonprofit staffed correctly, even with all of the fluctuations that will occur with your funding?

After turning in your grant applications, shifting your focus to nonprofit capacity building will help your organization feel more stable, with or without grant funding.

Nonprofit capacity building is the practice of improving your organization’s overall effectiveness. In slightly less general terms, that means looking at ways you can run your nonprofit so you can better serve your mission.

Applying for a federal grant could have been a result of a discussion around nonprofit capacity building. But improving your organization involves so much more than simply increasing revenue. Taking a more holistic view of how your nonprofit functions and identifying where you could or should make changes can help you:

• Build an organization with more stable funding.
• Manage a productive staff.
• Run impactful programs.
• Spread the word of your mission more effectively.

But since you’re looking at a potential staff increase if your federal grant application gets approved, let’s focus on maintaining the right staffing levels for your nonprofit.

Even if you win a federal grant for your program, your nonprofit’s funding will likely always fluctuate. You can (and should) try to get ahead of these fluctuations by diversifying your funding sources. But since payroll typically accounts for 45% to 65% of nonprofit budgets, getting a handle on staffing is also critical for navigating funding changes.

You can learn more about nonprofit staffing strategies in our in-depth blog post, “Maintaining Proper Staffing Levels for Nonprofit Capacity Building.” But below are a few highlights to help you manage your staffing needs.

Use historical data to better understand what you can do with more staff.

Using employee timesheet data can show you the amount and type of work your staff can complete at its current level. By knowing what you can achieve now, without making any changes, you can better understand how much more work you’ll have to do to meet your goals.

For example, increasing funding is crucial if you have a goal of feeding 10% more families this year than you did last year. But you’ll likely also have to hire more people to purchase, prepare, and distribute those meals to meet your goal. Timesheet data can show you how many hours it takes to run your program at its current capacity. And with those numbers in mind, you can decide how many more people it will take to feed 10% more people.

In short, historical data can help you meet your goals and avoid over- or understaffing your programs. Keeping staffing at the right level will also help you prevent burnout, ensuring you can retain talented employees who contribute to the success of your programs.

Know what a skeleton staff will look like.

In the worst case scenario of a dramatic reduction in funding, you’ll need to understand which staff members you have to retain in order to keep operating. While calculating your bare minimum staffing level isn’t nearly as fun as making staff projections based on unlimited funding, it’s still important. Knowing your bare minimum can tell you the amount of funding you need to obtain just to keep your doors open.

Historical timesheet data can also come in handy here. You can mine it to show you which employees work on which tasks and programs and how many hours it takes them. From there, you can make difficult decisions about which tasks — or even programs — might become superfluous if your funding drops.

Check in regularly on overall staff performance.

You shouldn’t limit turning a critical eye to staffing when you’re about to receive — or when you’ve already received — a grant. Instead, you should plan to check in on staffing levels and how they help you achieve your goals on a regular basis.

If you’re not meeting your goals, for example, you might be understaffed. Your employees could be burnt out and unable to perform at their full potential. Even hitting milestones long before they’re scheduled could be an issue, as it could indicate that your staff doesn’t have enough to do.

Finally, if you find your staff or contractors are continually working overtime, you definitely need to make some staffing changes. Consistently working more than a full workweek is sure to cause burnout eventually. But overtime payments will wreak havoc on your grant budgets, causing you to spend more on staff salaries than you calculated and potentially leading to dipping into unrestricted funds.

Conducting regular evaluations of performance will help you match your staffing levels to your workload before an imbalance causes a mass exodus due to burnout or boredom.

Start resource planning.

Resource planning helps you allocate employee hours to different programs and projects based on their budgets. Especially if you win a federal grant, you’ll want to start using a resource planning tool to track, allocate, and communicate workload expectations.

By creating and sticking to your payroll budget plans, you can run your programs efficiently and avoid needing to dip into unrestricted funds to cover unexpected costs.

Build a multi-talented staff.

Every organization wants to hire highly talented employees. Nonprofits, especially, should hire and retain cross-departmental staff. By employing people who can work across multiple disciplines, you’ll be able to cover critical tasks, even if your funding decreases.

However, employees won’t always come to you with a varied skill set. To ensure you always have a multi-talented team on board, you should plan to invest in cross-training staff members. Fortunately, some grants will cover a portion of employee training costs, so you can include it in your budget proposal. Even if you have to use unrestricted funds, remember that employing a highly skilled staff is never a bad thing.

By focusing on maintaining the proper staffing levels at your nonprofit, you can better weather funding fluctuations. With a diversified funding stream, along with a staff that can work across different departments and programs, you can ensure your nonprofit can keep working toward its mission even when the budget is tight.

But in between those milestones, there’s a whole lot of work to be done. And you need to get in the habit of tracking all of it. Using timesheets can help to track the work your staff does — and they’re also required according to 2 CFR 200 regulations. But the data derived from timesheets can also help you optimize your hard-won grant funding.

With timesheets, you can conduct a time study. Time studies will help you allocate current grant money to employee wages and plan for grant spending in the future.

Time studies are critical because they can show you what portion of your time — and what portion of your employees’ salaries — could be reimbursable from a federal grant perspective.

Since grants fund programs, time spent on most programmatic activities will qualify for salary reimbursement. However, many grants will also allow you to allocate a certain amount of funding to indirect (management and general) expenses, including staff salaries.

To allocate funding to either a direct (programmatic) or indirect (management and general) salary expense, you need to understand how much time was spent doing which activities. And to do that effectively, you need some sort of reliable time tracking method.

For effective wage-to-grant allocations, you’ll need access to two major tools.

1. Fund Accounting Software

Looking at a nonprofit’s funding sources should be like looking at the plate of a picky eater: nothing should be touching. Funds should be separated into restricted (anything designated for a specific use) and unrestricted (for general use) categories. And within your restricted funds category, each funding source (typically a grant or endowment) should be distinct from one another.

When you start allocating wages to each grant, you’ll have to draw from each fund according to the time spent working on reimbursable activities.

Fund accounting software helps automate various accounting processes. But most importantly, it helps you separate your funding sources and allocate expenses appropriately, according to fund accounting best practices.

2. A Standardized Method of Tracking Time

We can argue about the benefits of using software (automates and timestamps tasks) versus spreadsheets (free) to track time all day. But what we can’t argue about is the need for you to standardize your time tracking process so you can accurately, thoroughly, and compliantly record employee timesheets.

Especially when you receive federal funding, you need to understand where every minute goes and whether you can count it toward your grant funds.

While employees might find it easy to use spreadsheets to enter their time, approving time entered, making sure data is being properly imported, and proofreading your formulas can all become extremely difficult when using spreadsheets.

To connect time to wages, you’ll need to make sure you’re recording a complete, accurate, and thorough record of employee time. What does that mean?

• Complete timesheets mean that every work hour is accounted for. In some organizations, this can be as simple as making sure that everyone has worked at least 40 hours during a week.
• Accurate timesheets mean that what’s recorded is an honest representation of how an employee spent their time. Instead of averages and estimates, it shows — down to the minute — where employees’ time went.
• Thorough timesheets include relevant details for your accounting department. This can vary by organization, but an example might be including a brief description of each task performed. This level of detail can help nonprofits in the event of an audit.

You record all of this information in a spreadsheet. However, time tracking software, like fund accounting software, will automate and simplify many of the complex processes behind time tracking. Incomplete timesheets can be automatically sent back to an employee, for example. Tools like stopwatches can help employees record their time down to the minute. And categorizing time entries by custom fields or adding notes to tasks can give accountants and auditors all the detail they need to verify wage allocations.

Whatever tool you use, you’ll need complete, accurate timesheets in order to properly invoice your grantors. With accurate timesheets, you can then run payroll, allocate the right proportion of each employee’s wages to the grants they worked on, and confidently ask for funder reimbursement.

Time tracking is critical when it comes to getting reimbursed for employee time spent on programmatic activities. But it’s also important for allocating any wages that go toward indirect expenses in the fundraising and management and general categories.

Let’s say you have two grants that fund two separate programs. Grant 1 covers meals for individuals experiencing homelessness. And Grant 2 covers finding and applying for identification documents for unhoused individuals. You operate each program out of a shelter your nonprofit owns.

Because these programs run out of the same center, many of their administrative activities will likely overlap. Without a detailed time tracking system, your nonprofit won’t know how much employee time and wages to allocate to each grant. And without this data, you could end up over-allocating indirect expenses to one grant when another grant could have covered the cost. If you do this too frequently, you could end up burning through funding for indirect expenses for both grants, requiring you to tap into unrestricted funds to cover the difference.

Making sure employees are filling out accurate, complete, thorough timesheets helps you see where you can allocate wages to either fund without using either up too quickly or leaving money on the table.

You can find more information on the importance of time tracking for allocation in our in-depth blog post, “Perfecting Nonprofit Time Studies: The Art of Wage-to-Grant Allocations.”

Like invoicing, a financial audit involves gathering lots of information and records to hand over to the government. By creating a process around audits, your organization can prepare and be ready for an audit anytime it happens.

Gathering all the necessary information for an audit will inevitably be a team effort, even if software makes it easier to locate. Assemble your team members to create a process and timeline to prepare for upcoming audits. Make sure everyone knows their deadlines and responsibilities to make the process efficient.

No matter what the results of your audit are, you need to share them with relevant team members and your board. An audit is essentially a report on the financial health of your nonprofit. It’s also a measure of whether your nonprofit is managing federal funds responsibly.

If you’ve passed an audit but need to make minor improvements or adjustments to your processes, your board and team need to know what that means for your nonprofit overall. And if you didn’t pass an audit, you’ll need to work together to come up with a plan to make necessary changes in a timely manner.

Learn more about the auditing process in our in-depth blog post, “How to Easily Pass Every Nonprofit Audit.”