After the Award – The Work Begins

Many small businesses who receive grants, such as Small Business Innovation and Research (SBIR) grants, think the work is putting the proposal together for the grant.  Their perspective is that the proposal itself is the toughest part of the grant process.  Reality is the toughest part is satisfying the grant’s requirements.

The work begins technically and administratively after the award.  Award recipients are well equipped to execute on the technical or program aspects of the grant.  The challenge for most small businesses is to understand and comply with the full scope of administrative and financial systems requirements.

The expectation for the grantee is “effective control and accountability for all funds, property and other assets.  Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes.”  The exact processes or systems are not specified – just the result – “adequate” controls.

In addition to the administrative and financial controls, recipients are tasked with properly identifying, classifying, and reporting costs under the award and in the business.  Not surprisingly, the treatment of costs is reported as one of the most common areas at issue in audits.

Getting indirect cost rates right is important because the government reimburses this is the portion of the general and administrative and overhead expenditures of the business are reimbursed by.  The ability to identify and classify costs not directly associated with a program while at the same time understanding the degree of benefit received by the program is a key element in addressing indirect cost rates.  The indirect cost rate is calculated as a result of allowable, allocable indirect costs divided by the selected direct cost base.

To support rate submission, certain documents may be used:
•    Organizational charts
•    Audited financial statements
•    Budgets
•    Certifications from key personnel that indirect costs as reported are true and correct
•    Narrative descriptions of indirect cost pools
•    Summary schedule of rates
•    Cost policy showing how costs are charged and other key information

Underlying all of the activities of the grant is the need to monitor, track, and report what results are being achieved and how resources (dollars) are being spent.  In order to administer and manage the grant funds, businesses must be capable of financial management and have internal controls.

The most basic element of financial and internal controls rests in the accounting policies, procedures, and systems.  Within the transactional activity of the organization are the elements and mechanisms of financial and managerial control.  From the origination of a transaction, through its execution, and recording, the business uses resources that are ultimately measured in dollars and cents.  All transactions require some level of authorization, tracking, and reporting, regardless of the financial value.

How a business chooses to originate, identify, and compile transactions is a result of the level of detail necessary to control and report accurately the use of funds.  Furthermore, the relationship of the transaction (direct or indirect) to the specific projects, programs, and activities is a factor the organization must consider in evaluating the appropriate level of oversight and control for categories of transactions.

Underlying transactional controls are policies and procedures which are established to ensure that costs are treated consistently across programs and projects – whether they are federally funded or commercial.  The business must apply the same level and manner of controls to all financial resources and operational activities as called for in the organizational charts, manuals, policies, and other documentation.

Elements of the financial and internal controls are demonstrated via documentation that includes internal documents – organizational charts, policy and procedure manuals, payroll records, time cards/sheets, expense reports, and so on.  These documents normally display “how” the business authorizes, reviews, and reports transactions.  Further documentation and authentication of controls is provided by third party documents such as receipts, purchase orders, shipping records, and other paper trails.

Businesses can best demonstrate awareness and compliance through written authorizations, formal policies and procedures (manuals, etc.), and “adequate” paper trails which include internal and third party “paper”.  Tangible evidence (paper and signatures) enables the business to facilitate consistency in operations and treatment of financial transactions through the ability to reference specific policy and procedural steps.  In addition, tangible evidence is reviewable during audit processes.  Note: to be compliant, a business must demonstrate that formal policies and procedures are followed by the organization at a transactional level.  It isn’t sufficient to have something only in writing.  What is written must be followed and have “adequate documentation” as verification.

In making any rate submission or undergoing any audit, the ability to evidence the appropriate and consistent treatment of costs (financial transactions) enables businesses to calculate, document, and request rates which reflect the reality of the total activity.  This includes the ability to identify direct costs and bill them to the appropriate program as well as enabling a “fair share” allocation of indirect costs (business infrastructure) across programs which benefit from them.

Well-documented costs (actual or forecast) are important to the ability of any business to negotiate appropriate rates which recognize shared benefit as well as direct activity.  An appropriate strategy is to establish policies, procedures, systems, and tools which enable your organization to achieve transactional accuracy and realistic forecasts as a normal part of business.  The best tactic is to design (or redesign) your business infrastructure and activities to provide the necessary detail and documentation as transactions occur.  While this may take some additional effort and possibly some upfront investment, the long-term payoff is the ability to recover these costs in your rates.

Copyright ©2005 F.O.C.U.S. Resource, Inc.

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