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Plain-English guide · for small nonprofits
2 CFR 200.305, explained in plain English
Updated September 2026
Federal money arrives one of two ways, and the rules about how long you may sit on it are stricter than most small nonprofits realise.
You can be paid in advance or reimbursed after the fact. Advance payment is conditional on having written procedures that keep the gap between drawing the money and spending it as short as possible. Sitting on federal cash is the thing this section is designed to prevent.
Advance or reimbursement
Advance payment is available on two conditions. You maintain written procedures that minimise the time between the transfer of funds and your disbursement of them, and the amount you draw is limited to the minimum needed, timed to actual immediate cash requirements. If you cannot meet those conditions, reimbursement is the method.
Under reimbursement, the agency or pass-through must pay within 30 calendar days of receiving your request, unless they believe the request is improper.
The cash management rule
The principle running through the section is that federal cash should not sit in your account. Draw what you are about to spend, and spend what you draw. Where you have several federal awards, consolidate the requests rather than drawing separately for each.
For a small nonprofit with thin cash reserves this cuts against instinct. Drawing a comfortable buffer is exactly what the section prohibits.
Interest
Advances are generally held in interest-bearing accounts. You may keep a small amount of interest each year for administrative expenses; above that, interest is returned annually. Confirm the current retention figure and the return route before you set a policy, and note the carve-outs for organizations receiving smaller amounts of federal funding.
Separate bank accounts
A federal agency must not require you to keep a separate depository account for federal funds. Plenty of small nonprofits open one anyway because someone told them to. It is a choice, not a requirement, and the real obligation is that your accounting records can identify the funds, not that your bank can.
What to actually do
Write the drawdown procedure, however short
Advance payment is conditional on having written procedures. One page naming who draws, on what trigger, and how fast it is disbursed.
Time draws to payroll and payables
The defensible pattern is drawing against known imminent disbursements.
Do not open a separate account because you assume you must
Fund accounting in your books is what is actually required.
This is general information, not legal or accounting advice. Federal grant rules change and are applied differently by different agencies and auditors. Check with your auditor, your grant officer, or an attorney before relying on any of it.
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Sources: 2 CFR Part 200 (eCFR), read 29 August 2026 and re-checked 1 September 2026. Federal grant rules change; check the current text before relying on this.