Financial Management Standards

Financial Management System Requirements (§200.302)

Section §200.302 establishes the baseline requirements for every non-federal entity's financial management system. This is not a suggestion about best practices — it is a regulatory requirement. Your organization's financial management system must provide effective control over and accountability for all funds, property, and other assets. The system must be sufficient to:

• Identify federal awards — the system must identify all federal awards received and expended and the federal programs under which they were received. This includes the Assistance Listing title and number, the federal award identification number (FAIN), the fiscal year of the award, the name of the federal agency, and the name of the pass-through entity (if applicable)
• Maintain accurate records — records must adequately identify the source and application of funds for federally-funded activities, including authorizations, obligations, unobligated balances, assets, expenditures, income, and interest
• Provide accurate financial data — the system must provide accurate, current, and complete disclosure of the financial results of each federal award or program in accordance with the reporting requirements
• Track expenditures against budget — the system must compare expenditures with budget amounts for each federal award
• Support allowability determinations — the system must provide information to demonstrate that costs charged to federal awards comply with the cost principles in Subpart E
• Produce source documentation — records must be supported by source documentation such as cancelled checks, paid bills, payrolls, time and attendance records, and contract/subaward documents

For healthcare organizations managing multiple grants, the practical implication is that your accounting system must be able to track expenditures by grant, by budget category, and by period. Organizations using a single general ledger account for all grant activity will not meet these requirements. Each federal award should have its own set of accounts (or cost centers) that allow expenditure tracking at the level required for financial reporting.

Internal Controls (§200.303)

The non-federal entity must establish and maintain effective internal control over the federal award that provides reasonable assurance that the entity is managing the award in compliance with federal statutes, regulations, and the terms and conditions of the award. The internal control framework must comply with either the “Standards for Internal Control in the Federal Government” (Green Book) issued by the Comptroller General or the “Internal Control — Integrated Framework” issued by COSO.

In practice, this means organizations must have documented policies and procedures for:

• Segregation of duties (no single person should authorize, process, record, and reconcile a transaction)
• Authorization and approval processes for expenditures
• Physical safeguards for cash, property, and other assets
• Regular reconciliation of financial records
• Monitoring of subrecipient compliance
• Timely and accurate financial reporting

Small organizations often struggle with segregation of duties because they lack sufficient staff. In these cases, compensating controls — such as board review of financial statements, independent bank reconciliations, or supervisory review of transactions — can partially mitigate the risk. Document the compensating controls and the rationale for why full segregation is not feasible.

Payment Requirements (§200.305)

Federal awards can be disbursed through two primary mechanisms: advance payments and reimbursement. The method specified in the award terms governs how and when the organization receives federal funds.

Advance Payments

Advance payment is the preferred method when the organization maintains or demonstrates the willingness to maintain both written procedures that minimize the time elapsing between the transfer of funds and the disbursement, and financial management systems that meet the standards of §200.302. When receiving advance payments, the organization must limit cash on hand to the minimum amount needed and time disbursement requests to correspond with actual, immediate cash needs.

Federal agencies may require that advance payments be deposited in an interest-bearing account. Interest earned on federal funds must be remitted annually to the Department of Health and Human Services Payment Management System (PMS), except that non-federal entities may retain up to $500 per year of interest earned for administrative expenses.

Reimbursement

Under the reimbursement method, the organization pays for expenses first and then requests reimbursement from the federal agency. This method is required when the organization cannot meet the standards for advance payments or when the federal agency determines that reimbursement is necessary to protect the government's interest. Reimbursement can create cash flow challenges for smaller organizations because they must have sufficient working capital to cover expenses until reimbursement is received.

Program Income (§200.307)

Program income is gross income earned by the non-federal entity that is directly generated by a supported activity or earned as a result of the federal award during the period of performance. Examples include fees for services performed under the grant, the use or rental of real or personal property acquired under the award, and the sale of commodities or items fabricated under the award.

For healthcare organizations, patient revenue generated by grant-funded clinical services (including Medicaid, Medicare, and sliding-fee-scale payments) may constitute program income depending on how the award terms define it. The treatment of program income varies:

Cost Sharing and Matching (§200.306)

Many federal awards require the recipient to contribute a non-federal share of the project cost, either as cost sharing (the recipient provides a portion of total project costs) or matching (the recipient matches federal funds at a specified ratio). Under §200.306, cost sharing or matching contributions must meet all of the following criteria:

• Verifiable from the organization's records
• Not included as contributions for any other federal award
• Necessary and reasonable for accomplishment of project objectives
• Allowable under the cost principles of Subpart E
• Not paid by the federal government under another federal award (except where authorized by federal statute)
• Provided for in the approved budget

In-kind contributions (donated goods, volunteer services, donated space) may count toward cost sharing if properly valued and documented. Volunteer services are valued at rates consistent with those ordinarily paid for similar work in the organization or labor market. Donated supplies are valued at fair market value at the time of donation.

The 2024 revisions added an important protection: federal agencies may not require cost sharing or matching unless required by federal statute or regulation. Voluntary committed cost sharing is discouraged because it creates additional compliance requirements and audit exposure. Before committing to cost sharing in a proposal, organizations should carefully consider whether the commitment is truly required.

Period of Performance (§200.309)

The period of performance is the time during which the non-federal entity may incur new obligations to carry out the authorized work. Costs must be incurred during the period of performance to be charged to the award, with limited exceptions for pre-award costs (up to 90 days before the start date, with prior approval) and closeout activities (up to 120 days after the end date, for liquidation of obligations incurred during the performance period).

If the project will not be completed by the end of the performance period, the organization must request a no-cost extension from the federal awarding agency. Some agencies allow a one-time, no-cost extension of up to 12 months that the recipient can invoke unilaterally by providing written notice at least 10 days before the end of the period. Additional extensions require formal agency approval.

Budget Revisions and Program Plan Changes (§200.308)

Organizations may need to reallocate funds between budget categories during the period of performance. The rules for when prior approval is required depend on the type and magnitude of the change:

• Budget transfers — prior approval is required for cumulative transfers among direct cost categories that exceed 10% of the total budget (as last approved). Transfers of 10% or less generally do not require approval unless the award terms specify otherwise
• Scope changes — any change in the scope or objectives of the project requires prior approval
• Key personnel changes — changes in the project director or principal investigator require prior approval unless the award terms allow otherwise
• Adding new budget categories — adding costs not in the approved budget (e.g., adding a subcontract when none was budgeted) requires prior approval
• No-cost extensions — extending the period of performance without additional funding requires prior approval (except for the one-time unilateral extension where permitted)

Sound financial management is the foundation that supports compliance across all other areas. For related guidance, see our chapters on cost principles, reporting requirements, and audit requirements.