Have you ever looked at a grant opportunity…and decided not to apply because the financial information requested seemed out of your league?
Non-profits are businesses, in addition to being amazing organizations dedicated to sharing resources with people in need and creating positive change in our communities. But, simple appeals to noble hearts will not win most competitive grants. Appealing to a foundation is similar to wooing an equity investor to take partial ownership of your work. So if you are not currently tracking income and expenses formally every month, it’s time to get started. The time you invest to understand your organization’s finances will help you solve problems, identify opportunities to supersize your mission, AND win more grants.
Here are the three kinds of financial statements that every non-profit business really needs to make decisions and analyze opportunities.
Profit and Loss Statements
Simply put, a profit and loss statement records the income and expenses of the organization. Usually, there are categories of both income and expenses to help keep track of the costs of providing services and administration. For grants, funders want to see that you have a means of tracking income and expense. Non-profits usually submit some version of this operational budget for approval to their board of directors annually. Accountants set up budgets by comparing income and expenses year to year, as well as matching income streams with the expenses that relate to them.
Comparability. It is correct to say that most non-profits have lower income this year. But for a grant application, it is a stronger statement to say that event income in 2020 was down 76%, leading to a matching decrease in services of 46%. These numbers are found by comparing the income from this year with last year, and then comparing the outcomes (number of client visits, or respite sessions offered, etc.) with the income changes. This is called comparability, which simply means that your budget shows multiple years and the changes over time are calculated to ensure accurate forecasts.
Matching. Especially in the case of grants, income for the purpose of one project needs to match expenses related to that project. Your accounting software should make this easy to implement. There should be a separate account for any project that involves a grant, with line items related to the project budget.
For example, the COVID-19 pandemic has affected non-profit budgets this year, in many cases due to cancelled events. Lower income has forced many non-profits to reduce expenses through layoffs and lower levels of service. However, some non-profits have also received unexpected grants from both government and foundations to add to the income side of the equation. A useful metric for a new grant request might compare the income lost from cancelled events with the income gained from COVID-19 grants. Especially if this comparison shows a continued deficit, your funder will be impressed to know that you can document the exact amount of missing income, and the corresponding lack of services that will happen UNLESS the grant is provided to help you carry on.
Learn more about accounting systems and budgeting here: Wallace Foundation Budgeting Guide
Cash Flow Budgets
A cash flow budget simply shows the actual income and expenses paid each month, or sometimes each quarter. While the monthly totals will fluctuate, and sometimes even record a deficit, the overall budget forecasts how the non-profit will meet its financial obligations. While foundations rarely ask to see this budget, it is crucial to assess how a grant will impact your cash flow, especially if it’s a reimbursement-based grant.
Non-profits may have monthly income from government grants that reimburse services under contract, but also may have major donations and grant income that is expected but not yet paid. Tracking the in-flows and out-flows is essential to ensuring that your non-profit stays solvent. After all, if you cannot make payroll, your staff will not stick around long.
Sometimes your cash flow budget will help you decide NOT to apply for a grant. For example, if a $5,000 grant requires a 3:1 match paid out in the second quarter ($15,000) and your non-profit historically has cashflow issues in the second quarter, you should not apply for that grant. Unless there is a major donor standing by willing to pony up the difference, the successful grant obviously would require more than you can afford to pay in order to implement.
Learn more about cash flow budgets here: Wallace Foundation Cash Flow Budgets
Balance Sheet or Statement of Financial Position
This might be the big, scary financial statement that caused you to shy away from a bigger grant request in the past. And, to be fair, it is best to trust your gut when you know your organization is not ready for that six-figure ask. However, don’t let fear of the unknown stop you. Sure, a balance sheet is probably most useful for larger non-profits with incomes over $250,000 a year. However, for smaller organizations with fewer assets or liabilities, your accounting software makes it easy to create a statement of financial position to guide decision-making.
The balance sheet shows the assets (cash on hand, equipment owned and receivables from contracts, pledges, and grants) and liabilities (debts, taxes, and accounts payable). From the information on this sheet, you can calculate working capital, which simply means how many days of operations you can afford to pay. Imagine stating in your grant narrative, “We have 32 more days of operations in our reserve fund. See our attached balance sheet to understand the reason this emergency COVID-19 grant from XYZ Foundation is needed so we can continue to fund emergency food donations to homeless families.” You also can show the percentage of restricted assets, which are funds donated that can only be used for purposes outlined by the donor. Sometimes, an organization may have so many restricted assets that fresh attention must be paid to general operations income. Could this information be helpful when seeking grants? Sure. And it is also worthy of a lively conversation at a board meeting.
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