Improving Grant Financial Management with Time Tracking

How Much Do Nonprofits Really Spend on Payroll Expenses?

First, let’s talk about how significant payroll expenses are in a nonprofit’s organizational budget. In the 2019 Nonprofit Impact Matters report issued by the National Council of Nonprofits, nonprofit organizations employed 12.3 million people and paid over $826 billion in salaries, benefits, and payroll taxes. Not only do nonprofit organizations meet critical needs in our communities through their invaluable services, they are a significant economic engine to our economy, employing more than 10% of the total private workforce in the U.S., and spending nearly $2 trillion annually. These overall sector figures indicate that on average, just under 45% of a nonprofit’s expenditures are related to payroll costs. But this calculated percentage is watered down by the budgets of large nonprofit institutions like hospitals, colleges, and universities that often have significant buildings to maintain and allocate proportionally significant amounts of money to facilities. When you look at smaller agencies individually, which is the nature of my work, you find payroll most often represents as much as 65% of the budget. This caveat notwithstanding, nonprofit organizations manage and expend a significant amount of revenue on personnel costs. So, where does the income come from, and why is this relevant to transparency, accountability, and compliance?

The Importance of Diversifying Your Nonprofit’s Revenue Sources

When I train organizations on fiscal matters, I consistently talk about revenue diversification and its significance. Nonprofit organizations pursue various revenue sources to pay operational costs so they can meet their mission and build internal capacity. These sources can typically include:

• Donations from individuals
• Sponsorships from businesses
• Grants and contracts from government entities
• Fees for services (such as insurance reimbursement, client payments, or performance contracts)
• Planned giving
• Membership dues
• Special events

The degree to which an organization receives funding from different sources defines its diversification. When an organization relies too heavily on a few sources, they may expose themselves to the risk of  modifying or discontinuing various services if one of these significant budget sources disappears or is dramatically reduced. For example, a couple of my clients regularly received over 90% of their funding from federal grants. Since Acts of Congress prescribe federal funding, this level of reliance on one source could wreak havoc on a budget tied to congressional sessions and partisanship. Each of these clients made an intentional decision to diversify their organization’s revenue mix by developing plans to reduce the percentage of their budget, over time, that came from federal grants and increase the percentage coming from donated sources. Revenue diversification is a significant factor in nonprofit sustainability, but it also impacts operations concerning accountability and compliance. Much of the revenue nonprofit organizations receive comes with conditions. Even though it may come from various sources, many of these sources place restrictions on how the funds must be used or, at a minimum, require the nonprofit to submit a budget of how they plan to use the funds. And the organization typically must seek prior approval if they want to make modifications. So, too much diversification could create a significant recordkeeping burden. Turning back to the 2019 Nonprofit Impact Matters report, the entire nonprofit sector earned 49% of its revenue from the organization’s fees for services. The remaining 51% was earned from government grants and contracts (31.8%), or received as donations from individuals, foundations, corporations, and bequests (14%), or is procured by other means such as special events and raffles, or investment, rental, and royalty income (5.2%). So, what is the missing link in this chain that describes the relationship between nonprofit services, employees, salary expense, revenue mix, third-party restrictions, and budgets? The answer is tracking time.

Time Tracking is Critical for Maintaining Federal Grant Compliance and Accountability

Having good accounting policies, procedures, and systems can ensure a nonprofit organization can accurately track time by various factors, including sources of funding, projects, services, and functions. I have helped clients strengthen processes and procedures that allowed them to capture critical timekeeping information to use in decision-making, funder reporting, grant applications, and performance monitoring. Whether an employee is paid hourly or is salaried, the organization must track how employees spend their time whether the revenue is from government grants or restricted donations. After a grant budget is created, a program or grant manager is among the first of several people in the overall process who must ensure the team remains within the budget. Often, when employees have no formal tracking or accountability mechanism, they:

• Spend time working on a task that is not allowable by the grant.
• Divide their time incorrectly among multiple grants.
• Continue working on a grant whose funds have been exhausted.

How Time Tracking Ensures You’re Using Your Nonprofit’s Funding Appropriately and Effectively

Several grants (typically government) requiring reimbursement requests require agencies to submit documentation proving how time was spent on their grant with hours reflected by day, by position, and by program. When drafting budgets, finance department staff and grant writers need historical information of actual time expended by program, funder, or task to accurately develop budgets for new projects. Additionally, as the fund development team is prospecting new revenue sources and submitting applications, they need to know which staff are fully funded and which positions have time available to assign to new proposals. One of the most significant areas influenced by accurate time tracking is allocating expenses among the functional classes of programs, management and general, fundraising, and membership.

Tracking Time Benefits Both Your Nonprofit and Stakeholders

Expense allocations are a financial hot button for nonprofit organizations, and it’s the area where all stakeholders focus when assessing stewardship. Everyone wants to know how much of their generosity — through donation, grant or sponsorship — was spent on programming versus administrative costs and fundraising expenses. Understanding where your staff spends its time is one critical component for creating an accurate cost allocation plan. Since salary and benefits are usually the most significant expense for a nonprofit, they are a top-funded line item by resource providers. They therefore carry significant compliance and accountability requirements. So, investing deliberate thought into developing an internal control system that includes timekeeping as a cornerstone and contributes to developing accurate cost allocation plans is critical. Incorporating time studies into the plan is also important since some personnel spend their time  in multiple functional areas like the executive director, deputy director, and sometimes the director of operations.