Nonprofit Budgets: Understanding Restricted Funds

After the project is completed, the ideal outcome would be for any leftover funds to be released from restrictions. However, this ideal scenario must be agreed upon before the funds are used. Consider a nonprofit that receives $50,000 for an endowment fund where the interest earned on those funds will support a scholarship. That nonprofit will need to keep those funds dedicated for that purpose and only release the pre-designated amount for the scholarship each year. So, when they sit down to create a budget, those $50,000 will be earmarked and unable to be allocated elsewhere.

  • The sample income statement for 2018 shows $20,000 being released from restriction, while the remaining $40,000 remains in the With Donor Restrictions column.
  • Making progress to close or narrow equity gaps requires organizations to harness collaborative flexibility, which is increasingly difficult on a restricted budget.
  • FUTA taxes are reported annually using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
  • The organization should also train its staff on how to identify and record expenditures that should be allocated to restricted funds.
  • Fund accounting lets nonprofits allocate money into different groups and to keep them organized so that you only spend funds on what they’re designated for.

Propel Nonprofits is also a leader in the nonprofit sector, with research and reports on issues and topics that impact that sustainability and effectiveness of nonprofit organizations. The shape and form of the restrictions are defined in the “gift instrument.” The gift instrument is the document that establishes the use of the donated funds. Examples of gift instruments include award letters from foundations and letters from individual donors.

Are You Ready To Outsource Your Accounting?

Don’t hesitate to contact us — our nonprofit team is happy to assist you and your organization. Ask grantors and provider agencies if there is any flexibility in how funding can be used and when you may be able to access it. Review your organization’s “upcoming events” communications and solicitation material. Then, make sure the finance team, development team, and those charged with governance over the organization are in agreement with any changes and the reason for those changes. This way, you have consistent messaging across all levels of the organization, as well as with donors and the community. To learn more about strategically addressing your donors, check out this article on shaping your ask.

When it comes to handling money donated with specific restrictions, your organization must make sure it is effectively overseeing the use of the funds and keeping the funds organized. This requires strong financial planning, budgeting, reporting, and ongoing monitoring and evaluation of the organization’s financial performance. This requires careful financial planning, budgeting, reporting, and ongoing monitoring and evaluation of the organization’s financial performance. If donors don’t have confidence that their donation is really for the purpose advertised, you may handicap your campaign. The important thing to understand is that if you use a disclaimer or caveat, it needs to be very clear to the donor prior to the gift.

Unrestricted funds can be used for overhead costs like expanding staff, equipment, training and professional development, and emergency expenses. Covering critical expenses through an annual budget keeps nonprofits running smoothly and ensures the stability of the employees and the communities they serve. A strategy to fundraise for unrestricted funds is a key consideration for nonprofits to fulfill rising organizational objectives, especially when the services provided do not generate surplus income. Nonprofits often juggle the need to raise money with doing important work for their communities, which is where fund development becomes urgent. In the case of grant funding, there may be dozens of applicants trying to get the same pot of money for their own causes. Some nonprofits choose to focus on direct appeals to their communities, but there is no guarantee of success or even a specific amount of funding.

Temporarily restricted net assets

When asking for donations, you may end up getting restricted to the areas of your nonprofit you need the most. Instead of wasting a donation or using it to cover overhead costs, you are forced to use it responsibility within a small area. Both restricted and unrestricted grants are typically given by public and private sources, such as foundations, corporations, and government agencies.

This doesn’t mean restricted funds are always a major challenge or hassle for your organization! Until you deliver the goods or services, deferred revenue is seen as a liability and is recorded as such on your statement of financial position. Once the obligation is met, the revenue becomes an asset and is typically unrestricted. Accounting rules require nonprofits to record the entirety of a grant as income when it is received, even if the restrictions are not satisfied until a later date. RPN records the entire $50,000 grant as income on the income statement under the “Donor-restricted” column. A portion of this grant ($10,000) will be released from restrictions every year since it has a five-year restriction.

Accounting & Controllership

While that helps, it can also be off-putting to donors and potentially reduce incoming funds. Givers often want to make sure their money is used responsibly or betters a project close to their hearts. And it might make a donor feel good to say they’re funding a specific building or project.


While an organization may have funds available, they are not available to be used based upon the donor’s initial intent. With your 2021 budgets and cash flow modeling projects in full swing, consider whether donor restricted-contributions may be a viable option to help sustain your nonprofit organization’s operations. This statement is designed to show organizations how they’re allocating their resources and how their use of funding helps advance the organization’s core initiatives. In the example above, you can see that $150,000 of the funds for this organization are restricted and must be used for a specific purpose. That’s why certain measures have been taken to keep restrictions in mind when operating with fund accounting.

In our homeless shelter example, the board cannot simply redirect the use of the money from the facilities account to the food account, no matter how dire the circumstances, if those funds are the result of a solicitation. One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle money wisely. A nonprofit is no different than any other business in that you must make ends meet. And, as many nonprofits soon learn, it doesn’t really matter whether the economy is in recession or is booming…being wise about your organization’s financial resources is essential.

A U.S.-based international CPA can draw on expertise in all of these areas when advising you on your unique business setup. Beyond that, you may want to track grants, endowments, or large-money funders in funds of their own. That makes it easy for you to run fund-level reports to share with your benefactors. The funder and the nonprofit must have a written agreement detailing how the funds will be used.

Explain that while you’re grateful for their generosity, such a donation comes with bookkeeping challenges and additional costs. Disability-led nonprofit organizations in particular face challenges in obtaining funding. Restricted funding may not provide the resources to address disability inequity and overcome accessibility barriers in the scope of a particular project. Often, the larger the donation, the more likely that there will be donor-imposed restrictions. As a result, nonprofits that seek to attract gifts of this scale must be prepared to have robust accounting processes and procedures in place.

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