Restricted vs. Unrestricted Funds: What Nonprofit Leaders Need to Know

Your nonprofit receives a $25,000 donation.

Great news.

But before leadership decides how to spend it, there’s an important question:

Is the money restricted or unrestricted?

Understanding the difference is fundamental to responsible nonprofit financial management.

Not every dollar your nonprofit receives can necessarily be used wherever it’s needed most.

What Are Unrestricted Funds?

Unrestricted funds generally give the organization discretion to determine how the money should be used in support of its mission.

That flexibility matters.

Unrestricted dollars may help cover expenses such as administrative salaries, rent, insurance, accounting, technology, utilities, fundraising and other costs necessary to keep the organization operating.

These expenses may not always sound as exciting as funding a highly visible program, but nonprofits can’t deliver programs without infrastructure.

Unrestricted funding gives leadership greater flexibility to direct resources where they’re needed.

What Are Restricted Funds?

Restricted funds come with donor-imposed limitations on how or when the money can be used.

For example, imagine your nonprofit receives $20,000 specifically to provide scholarships.

That money shouldn’t simply be used to cover an unrelated operating shortage because the organization needs cash.

The donor provided the funds for a specific purpose.

Restrictions might relate to a particular program, project or time period.

The important point is that leadership must understand the conditions associated with the funding and maintain records that allow the organization to demonstrate appropriate use.

Why This Matters

Problems arise when nonprofit leaders look at the total bank balance and assume all of the money is available.

Imagine your bank account contains $75,000.

That sounds healthy.

But suppose $50,000 is restricted for specific programs.

Your organization doesn’t really have $75,000 available for general operating expenses.

It may have only $25,000.

That’s a very different financial position.

This is one reason cash in the bank shouldn’t be the only number nonprofit leaders review.

Grants Can Create Similar Responsibilities

Grant funding frequently comes with specific approved purposes, budgets, reporting requirements and performance expectations.

Receiving the grant isn’t the end of the financial responsibility.

It’s the beginning of stewardship.

Your accounting system should make it possible to identify and monitor grant-related activity so leadership can understand how much has been spent, how much remains and whether spending is consistent with the award requirements.

Waiting until the final grant report is due to figure this out can create unnecessary problems.

Your Accounting System Should Help You Track the Difference

Restricted funding shouldn’t live in someone’s memory.

Your financial records need a consistent method for identifying and monitoring funds with donor restrictions.

The appropriate accounting setup will depend on the organization and its circumstances, but your system should allow leadership to answer questions such as:

How much restricted funding do we currently have?

What purposes are those funds restricted for?

How much has been spent?

What remains available?

Are there deadlines or reporting requirements associated with the funding?

Can we support the amounts reported to donors and funders?

If those questions are difficult to answer, it’s time to strengthen the system.

Don’t Let Restricted Funds Create a False Sense of Security

A large bank balance can make an organization feel financially secure.

But if much of that money is restricted, the organization may still struggle to cover everyday operating costs.

That’s why nonprofits need both good accounting and good financial strategy.

Leadership should understand not only how much money the organization has, but also what that money is available to do.

Financial Clarity Protects the Mission

Funders and donors trust nonprofits to use resources as intended.

Strong tracking practices help protect that trust while giving leadership better information for planning and decision-making.

The goal isn’t simply to satisfy an accounting requirement.

It’s to ensure the organization understands its resources and can demonstrate responsible stewardship.

Every dollar has a purpose. Your financial system should help you know what that purpose is.

Kimball Ridge Advisory Services provides nonprofit accounting, financial reporting and advisory support designed to help organizations build stronger financial foundations and confidently steward the resources entrusted to them.