We’ve had not-for-profit clients who received money in one financial year, didn’t ring-fence it for that project, treated it as part of their available funds and spent it. Then the next year rolled around, cash was looking tighter than expected, and they still had a project to deliver.

The money had been spent, but the work still needed to be done.

With money coming in from different sources and for different activities, it can be hard to keep track without proper records in place. The bank balance alone won’t tell you how much is available for general spending.

You don’t need a bank account for every grant

A separate bank account for every grant is often just not practical. You may be receiving lots of grants or funding from all sorts of sources. Subject to any specific requirements from your funder, the money can sit in the same bank account. What matters is being able to distinguish it in your records and understand what is still needed for each project.

One shared spreadsheet, not three different versions

A trusty shared spreadsheet can work well for tracking grants. The relevant people can access and update the same file, so there is just one source of truth.

We had a client with three versions of the grants-in-advance spreadsheet held by different people, and none of them matched. We had to draw a line in the sand, agree on one version and move forward with that. We now update it every month and ensure the balance in Xero matches the spreadsheet.

The spreadsheet should bring together the funding received, what it covers, the amount recognised as income and the balance carried forward. Keep links to the agreements and note any milestones, reporting dates or approved changes.

Ideally, reconcile your grant balances every month, or at least every time reports are given to your board. Check that the spreadsheet agrees with Xero and that the recorded position makes sense against the project’s progress.

Management and the board need to understand which funds remain committed, rather than assume the whole bank balance is available to spend.

As the number and complexity of grants grow, review whether the setup still works or whether more integrated software would save time.

Set Xero up around the reporting you need

Setting Xero up properly is essential. How you do this will depend on your other reporting requirements, how many grants you are tracking and how many projects you have running.

Separate balance sheet account codes can make individual deferred grant balances easy to see at a glance. If there are lots of small balances, though, the account list can start to feel messy.

For tracking project expenditure, you might use specific expense account codes or Xero tracking categories. Tracking categories let you identify the project while retaining your usual expense codes for wages, rent and other costs.

You need to weigh up the time spent reconciling against how easily you can produce the accountability report. A setup that looks tidy but makes every accountability report a major exercise may not be the best option.

Where several funders contribute to the same project, keep a clear record of which costs have been allocated to each grant so the same expenditure isn’t claimed twice.

Your accountant can help choose an approach that supports both your financial reports and your funding obligations.

The project manager and accountant need to work together

Who updates your spreadsheet depends on how comfortable your project manager is with that work. Often, it’s easier for the project manager to explain the project’s progress to the accountant, who can then update the spreadsheet and post the journal in Xero.

Sometimes we know a project is under way, but no one has assessed how far it has progressed. That makes it difficult to calculate an appropriate amount of grant income.

Depending on the agreement, income recognition might follow milestones, eligible spending or a specified funding period. Where a grant is recognised evenly over an agreed period, we can set up recurring journals when the funding is received. That avoids manually repeating the same entry each month.

Those entries should still form part of the regular reconciliation, so changes to the funding arrangement are picked up.

Don’t reconstruct the accountability report at the end

Funders often require an accountability report showing how their funding was spent and whether that spending was permitted under the agreement.

That is not something you want to reconstruct at the end of a project, when details may have been forgotten. People may also have moved on, and supporting information can be difficult to find.

Some funders want invoices and bank statements showing the relevant payments. Preparing statements with the relevant transactions highlighted and unrelated information redacted can be cumbersome and time-consuming.

Understand the requirements at the start, retain the supporting records and code transactions consistently as you go.

If the project changes, speak to the funder before redirecting the money and keep their written approval with the funding agreement.

If the project finishes with funding unspent, or money has been used for something the funder did not approve, the agreement may require funds to be returned. Failing to meet accountability requirements can also affect future funding applications.

At The Accounting Hub, we can help get the records set up and keep the spreadsheet and Xero agreeing each month, with the information you need for reporting back to funders.