Not-for-profit entities are typically well-versed in the need to track grant expenditures, and may have robust accounting systems or policies and procedures in place. However, for-profit entities may not be as familiar with the importance of tracking grant expenditures separately.
Grant expenditure accounting involves tracking and managing how your entity uses the financial resources stemming from your award. There are several key steps in the process, but it starts with tracking expenses. By diligently tracking expenses, your entity can help ensure compliance with grant requirements and effectively manage grant funds.
Throughout the grant process, expenditures will be categorized based on their nature, such as personnel costs, supplies, equipment, etc. and charged to the award accordingly. Some of these expenditures may be directly attributable to the grant project (direct expenditures), while others may be shared among multiple activities (indirect expenditures). For indirect expenditures, it’s essential to allocate costs accurately based on the proportion of resources used for each of the projects. As an example, for indirect rental and utilities costs, you would allocate that cost using a reasonable method, such as based on square footage of space of each program. Labor and benefits, office supplies and indirect travel are examples of other indirect costs that may need allocated across projects. Allocating costs appropriately will require implementing internal controls and policies around approval of the allocations to help ensure they are in line with the terms and conditions of the grant award.
Payroll can fall into both direct and indirect categories. You will be required to track time and effort reporting, typically through timesheets detailing the portion of hours worked on each project or activity. From there, you can typically use percentage of effort for employees working on multiple projects; their payroll expense will be allocated based on the proportion of hours worked on each project, relative to total work hours during that period. Ensuring you document this information, maintain good records, and approve timesheets and allocations is critical in demonstrating the reliability of your grant expenditure records.
To assist in expense tracking, many companies use their accounting software to track expenditures by project or award. In addition, there are software options to assist in documentation retention and approval processes. These software tools facilitate the recording, categorization, and reporting of expenditures to improve efficiency and accuracy, and to provide an audit trail for grant requirements.
While expenses are critical to track for your federal award, it’s important to note that with a grant audit every expenditure related to the grant must be properly documented. This includes the maintenance of receipts, invoices, contracts, payroll reports, timesheets and many other relevant financial records. This documentation ensures the legitimacy of the expenses. Work with your auditors to help ensure you have the right documentation and processes in place to stay in compliance.
Contact Sean Kilcher or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.