Is This Your Situation: Managing Restricted Funds for a Nonprofit Organization?
March 26, 2019
At a glance
- Main takeaway: Nonprofits often receive substantial donations with specific requirements on how the donor would like their financial gift to be used. For nonprofits, this type of donation is categorized as restricted funds.
- Impact on your business: While it’s a common practice, nonprofits need to learn how to manage restricted funds properly to ensure they are being used in accordance with the requirements set forth by the donor.
- Next steps: Aprio’s Tax Exempt and Non-Profit CPA Services team can help you properly monitor and manage your restricted funds.
The full story:
It’s not uncommon to allow donors to have input in how their financial gifts are being used, as it motivates major gift giving but it can also come with strings attached. Let’s say you receive a large donation from a wealthy graduate who wants it to be used for a new science building. This is an example of how donations can come with specific conditions on how the money is to be used and is something nonprofits need to learn how to manage properly.
Exploring different types of funds
- Fund accounting requires funds from different sources and for specific purposes to be accounted for separately. While there is extra work involved, it’s worth it because donors who have a say in how their funds are used, see the direct benefits of their gifts. If donors give a few dollars for a specific purpose, those funds need to be used in the intended manner.
- Endowment funds are gifts intended as investments. While the principal is restricted, nonprofits may use the interest and any returns earned. However, sometimes the earnings may be restricted, say to support scholarship funds or a particular initiative.
- 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 manageable.
Let’s take a closer look at how nonprofits can manage 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 the funds. 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, unused funds must 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.
The bottom line
According to experts, the more affluent the donor, the more they prefer restricted gifts. The key is to manage these donations correctly. Aprio’s Tax Exempt and Non-Profit CPA Services team has experience monitoring a variety of funds and can help your nonprofit manage restricted funds.
Schedule a consultation with Aprio’s Tax Exempt and Non-Profit CPA Services team today