What a funder actually reads in your financial report

Most nonprofit financial reporting is built for the board. It answers the questions a board asks: are we solvent, are we on budget, how does this quarter compare to last one. That report is necessary, and it is usually the one an organization has.

A funder is asking something narrower and harder.

The three questions behind every funder report

Strip away the format requirements and almost every grant report is trying to answer the same three things.

• Did our money do what you said it would do? Not your money in general. Ours, specifically, tracked separately from everything else that moved through your accounts this year.
• Can you tell us that without a scramble? An organization that needs three weeks and a spreadsheet rebuild to answer a routine question is telling the funder something about how it operates.
• What happens when this grant ends? Funders are deciding whether to renew, and whether the thing they funded will still exist afterward.

The first question is the one that catches organizations off guard, because a normal set of books is structurally incapable of answering it.

Why standard bookkeeping cannot answer the first question

A conventional chart of accounts organizes spending by what the money was spent on. Salaries. Rent. Software. Travel. Professional fees. That structure answers "what did we spend money on this year," which is exactly what it was designed for and exactly what a tax preparer needs.

A funder is asking a different question: what did we spend your money on. That requires a second dimension. Every transaction needs to carry both an expense category and a source of funds, so that the same line item can be read two ways.

Without that second dimension, the only way to produce a grant report is to reconstruct it after the fact. Someone goes through the year, decides which portion of the program director’s salary should be attributed to which grant, allocates the rent, and builds a report that is defensible but not reproducible. Do that for four funders and the numbers stop tying out to each other.

Restricted does not mean set aside

A related confusion causes more anxiety than almost anything else in nonprofit finance: an organization looks at a healthy bank balance and cannot understand why the finance committee is worried.

Restricted funds sit in the same bank account as everything else. The restriction is a legal and reporting obligation, not a physical separation. So an organization can be simultaneously cash rich and operationally broke, holding money it is not free to spend on the thing it urgently needs to spend money on.

The bank balance is not the number. The number is the bank balance minus what is already committed to a specific purpose. If your books cannot produce that figure on demand, then nobody in the organization actually knows how much money it has, including the people who are certain that they do.

What a readable grant report looks like

The reports that go over well tend to share a shape, whatever template the funder imposes on top.

• Budget against actual, for the grant specifically and not for the organization as a whole.
• Variances explained in a sentence each, especially the favorable ones. An underspend is not good news to a funder, it is an unanswered question.
• The allocation method stated plainly. If 40 percent of a salary is charged to this grant, say why it is 40 and not 55. A stated method that is imperfect reads far better than an unstated one that is precise.
• Consistency with what you reported last period. Funders keep the old reports.

None of that requires sophisticated software. It requires that the underlying records were built to be read that way from the beginning.

If you are not there yet

Most organizations reading this are somewhere in the middle: one or two grants tracked carefully, the rest handled by reconstruction. That is a normal place to be and it is not an emergency.

It does become an emergency at predictable moments. A funder asks for something mid year rather than at close. An audit gets scheduled. A larger grant arrives with real compliance requirements attached. A finance lead leaves and takes the reconstruction method with them, because it lived in their head.

The work of restructuring is not glamorous and it is not fast, but it is finite, and it is far easier to do in a quiet month than in the week a report is due.