Managing Restricted Funds for an NPO

You get a large donation from a well-heeled graduate who wants it to be used for a new science building. This is just one example of money with strings attached that nonprofits need to manage appropriately. But allowing donors to have input in the use of financial gifts motivates major gift-giving.

Fund accounting — requiring funds from different sources and for specific purposes to be accounted for separately — is worth the extra work involved because donors who have a say in how their funds are used see the direct benefits of their gifts. 

If donors give even a few dollars for a specific purpose, those funds need to be used for the intended aim. Endowment funds are gifts intended as investments. While the principal is restricted, NPOs may use the interest and any returns earned. However, sometimes the earnings may be restricted, say to support scholarship funds or a particular initiative.

And there's the rub: Restricted and unrestricted funds must be kept separate, often leading to grid-style statements of finances instead of tidy single-column balance sheets. Why? Because each fund is looked at as its own business with its own assets and liabilities.

If you have multiple restricted funds, you need multiple accounts and multiple ledgers, which can get confusing. Although this seems complicated, accounting software for nonprofits is designed to handle these separate funds, making bookkeeping practices clear, straightforward and, hopefully, manageable.

Let's take a look at dealing with restricted funds:

• Use proper timing — record funds on your balance sheet when they're promised and not when you receive the money; this is called "accrual accounting."

• Separate them — restricted funds need to be kept separate from unrestricted funds for budgeting. Monitor the use of returns and interest from invested funds.

• Meet restrictions — when the time or purpose restrictions are met, you may be able to transfer the remaining funds to the unrestricted ledger. Sometimes, however, unused funds have to be returned to the donor or grantor.

• Use internal controls — these include clear monitoring of asset restrictions and the movement of funds as restrictions change or expire.

• Evaluate outcomes — when restrictions are purpose-based, monitor how well that purpose was accomplished. You can see why this works as a fundraising tool — to communicate how a particular gift worked, plus to recruit potential new supporters.

According to experts, the more affluent the donor, the more they prefer restricted gifts. The key is to manage these donations correctly. Give us a call and we'll help you properly handle restricted donations.