Nonprofit Accounting Basics

How Can I Explain the Bottom-Line Budget Impact of Multi-Year Grants?

Aug 06, 2021

Question: I am the Executive Director of a nonprofit organization that was recently awarded a 3-year grant. We recorded the grant in full last year. Our next fiscal year budget now shows a deficit. I am having trouble explaining this to my Board. How can I better communicate to my Board the impact of multi-year grants on our annual budgets?

Answer: The answer is to take a two-pronged approach. First, prepare financial schedules that show the anticipated annual usage of the multi-year grant for the life of the grant. Second, using this information, be thoughtful and assertive with your messaging to your Board. Communicating in a multi-year format will help to move attention away from the impact of a multi-year grant on any single-year budget.

Multi-year grants can be a true blessing for nonprofit organizations. They provide resources without the uncertainty of having to reapply or submit new proposals each year. The challenges lie in the years after receiving approval for multi-year grants. Since, as you correctly stated, the full amount of a multi-year grant is often required to be recorded when formal grant approval is received (showing a surplus in the year of approval), the grant funds will not appear in the budgets for the years that follow (showing a deficit). These challenges can be addressed with strategic advance planning, messaging, and communication.

As explained above, the first step is to prepare a schedule for the expected usage of the grant for the entire granting period. Recognize that a nonprofit’s fiscal year seldom lines up with the granting period, which I like to refer to as the Usage Authorization Period (UAP). Set up your UAP schedule to begin with the approval date of the grant and continue through the end of the UAP. Make sure to prepare and format the schedule based on your organization’s fiscal year. This enables you to display the surplus and deficit impact of the grant for each individual fiscal year.

A multi-year grant UAP can begin upon approval or have a later start date. Consequently, a 3-year grant could easily impact 5 fiscal year budgets, as illustrated in the following example:

  • Year 1: approval is received for a new 3-year grant.
  • Year 2: UAP begins mid-fiscal year.
  • Years 3-4: open UAP.
  • Year 5: UAP ends mid-fiscal year.

Most grant applications require submission of a detailed budget showing expected usage of the grant funds. This can be used as the starting point for preparing a grant UAP schedule.

The second step is to message and provide financial information through a multi-year perspective. Include in your budget narratives multi-year grant purpose and financial impact statements highlighting the expected total impact of the grant and its benefit to your organization.

Understand that asking for approval of a single-year budget with a deficit will catch the attention of Board members and cause feelings of unease. Mitigate these concerns by presenting the proposed current year budget paired with prior year(s) actual historical results. This will enable you to show how the multi-year grant has impacted past as well as the current fiscal years.

Planning Tip – Consider adding two temporary budget lines just below the grant revenue line. One budget line for “grant revenue realized prior year for use this year” (revenue addition) and a second budget line for “grant revenue realized this year for use next year” (revenue subtraction). This will show grant revenue on a usage basis and smooth the impact that multi-year grants have on annual budgets. These two new budget lines are not allowed by generally accepted accounting principles (GAAP), so plan to display budgets with and without these two additional budget lines.

Using multi-year messaging and communications will focus awareness on total impact and divert over attention from a single budget year. This approach is useful not only for multi-year grants but for other unusual funding and revenue sources such as large one-time donor gifts, estate gifts realized from planned giving efforts, capital campaigns, membership assessments, and events marking milestone anniversaries, to name a few.