A barrier to optimized funding allocation

**The impact of outdated systems hits your funding hard!**

Nonprofit programs are typically funded by multiple grants, each of which have their own restrictions, requirements, and limitations on where, when, and how the money must be spent. While some grant-issuing bodies are making efforts to relax or simplify restrictions, for example, during the 2020 global pandemic, navigating these conditions without wasting time and resources remains a barrier to optimized funding allocation.

Restrictive grant conditions

Grant-issuing bodies impose a number of restrictions and reporting requirements on nonprofits, including which programs or activities may receive the funding, what geographical region it must be used in, and in which financial year each installment should be spent.

The UK Fundraising Regulator, for example, requires that you must use all funds raised for a particular cause for that exact cause. You must make sure that donations are used to support the project in line with any conditions attached to the donation. And you must keep a record of contributions given for specific purposes to make sure that you stick to the conditions of the donation.

There are also conditions relating to a certain defined measure of success, the amount of allowable indirect costs a grantee can charge to the donor (specified as an Indirect Cost Rate), and how different types of transactions and costs must be recorded. The complexity increases, for example, when multiple funders provide match funding, as it must be reported to all donors in full, even though it is only refunded in part by each donor.

Cost allocation

In most nonprofits, costs are divided into direct (or program) costs and indirect (or administrative or operational) costs.

Direct costs can be clearly allocated towards a specific program, such as the program leader’s pay, equipment, or facilities rental. Indirect costs are things like head office real estate and administrative staff salaries.

Most nonprofits try to allocate as much spending as possible directly to programs. For example, a percentage of an IT manager’s time may be assigned to each of the programs they have worked on. True indirect costs have to be accounted for as a percentage of total costs and comply with the indirect cost rate specified in available grant conditions.

The impact of dated systems

Many nonprofits struggle to accommodate unique grant restrictions using inflexible and fragmented financial systems. This is because they are often unable to specify grant conditions with enough granularity and may not be able to link the system to procurement and accounts payable processes and workflows. The system may also have a limited number of fields for categories of expenses, for example, the finance team may need to supplement accounting with spreadsheets for reporting for each grant’s restrictions.

This necessitates manual double data entry, increasing the potential for human error. If the donor’s rules are not applied correctly, and spending is not being reported or reimbursed to donors, you might miss out on income. It may also result in having to refund the donor for ineligible costs; you might reduce future grant values due to unused funds; you might even lose future grants altogether due to inaccurate reporting and unaccountable spend.

Outdated systems also provide no real-time insight into the grant’s consumption, which makes it more challenging to optimize impact delivery dynamically and make tweaks according to progress. This lack of real-time insight in legacy systems may lead to over- or under-spending and inefficient program delivery.

Finally, inflexible legacy systems create manual, tedious work for your dedicated people, which can drain morale and effective frontline service delivery, reducing your ability to maximize the impact on your funding.

Digital influences are forcing NGOs and nonprofit organizations to change how they operate.
But are they ready to evolve? Read our blog to learn more:

Four responses to digital disruption from leaders in the nonprofit world