Managing Restricted Funds

Each month, Nonprofits Assistance Fund hosts the Financial Management Network.  These free, informal gatherings are opportunities for members of the nonprofit community to get together to discuss different financial topics and network with peers. Key takeaways from these discussions will be posted and form an archive to help promote healthy financial practices.

Notes from Managing Restricted Funds (3/25/2009)

Our resource, Managing Restricted Funds, is a helpful guide and includes:

  • Definitions
  • Accounting Requirements
  • Sample Income Statement
  • Sample Balance Sheet
  • Management Guidelines
  • Other Considerations

Different Types of Funds

  • Unrestricted Funds are free from any external restrictions and are available for general use.
  • Temporarily Restricted Funds have donor-imposed restrictions that will expire over a defined period of time or by performing defined activities.
    • These are most often in the form of a program grant and are common to most nonprofits.
    • When the restriction is satisfied, temporarily restricted funds are transferred into the unrestricted category with an accounting entry "Net Assets Released from Restrictions."
  • Permanently Restricted Funds are restricted by a donor for a designated purpose or period of time and will never expire.
    • These can be in the form of a scholarship or endowment fund whose investment income can be spent, while the principal remains intact.

Rules and Regulations

  • According to Generally Accepted Accounting Principles (GAAP) rules, grants and contributions must be booked in award year.
    • Grants restricted by a donor to a specific period of time or to a specific program or project should be temporarily restricted.
    • Multi-year grants must be restricted by year on Balance Sheet and Net Assets, if audited.
      • Ask your auditor if it is unclear whether funds should be restricted or not.
    • Note: Federal "grants" may actually be reimbursable contracts, with different requirements:
      • Recognize income when you receive it or when you bill it.
      • Award does not show up on the Balance Sheet.
      • See this table from the Federal Office of Management and Budget, to determine if an award is a grant or a contract.

Tracking Funds

  • Track restricted funds in accounting software.
    • "Temporarily restricted" category in Quickbooks, "funds" in Peachtree and Fund E-Z
    • To release from restrictions in Peachtree, transfer between funds.
    • Fund E-Z is available from MAP for Nonprofits
      • Fund E-Z can generate financial statements by fund cost centers - there are 3 levels of cost centers:
        • First level by programs
        • You can set up other levels by funder.
  • You must track restricted funds internally, so you know if cash is restricted or available for use.
    • Accidentally "borrowing" from yourself--using money from restricted or board designated funds--is not good management and, in the case of donor restricted funds, illegal.
      • The board can designate funds as a cash reserve. These reserves do not have the same legal restrictions as donor restricted funds, but need to be managed internally.
  • Using the Balance Sheet
    • Our sample Balance Sheet has a restricted column to show how much cash you really have to spend.
      • There may be a Temporarily Restricted Net Assets line under Net Assets, if not a separate column
    • When looking at a Balance Sheet, always look for temporarily restricted funds.
      • Ask how often temporarily restricted funds are updated. Quarterly? Monthly
        • Timing can depend on whether funds have time restrictions or restrictions by activity.
  • If you know you will use a grant or contribution in this fiscal year, is it worth restricting it, or should you just put it directly into unrestricted account?
    • Depends on organizational culture.
    • Many nonprofits put it into unrestricted and adjust at the end of the year to save work.
  • Spend restricted funds first whenever possible, so unrestricted funds will be available for future use.

Communicating about Restricted Funds

  • It's important for the finance and development teams within an organization to communicate.
    • Pay careful attention to grant award letters and letters from individual donors, where any restrictions will be defined.
    • Use your annual budget (which should match your chart of accounts) to make grant budgets.
      • Reporting at the end of the grant period will be difficult if there are line items in the grant budget that do not match line items in your accounting software.
      • Consider giving program and development staff a standard budget form. They can give foundations a different format, but it must be able to go back into the standard form.
      • If you submit the same program/project budget with different requests and get more money than you need restricted to that program/project, go to the funder and request reallocation.
    • Keep up good relations with donors, so restrictions can be reconsidered if they prove too challenging.
    • Have a gift acceptance policy in place to evaluate restricted gifts
      • What does the donor require in return?
      • Do we have the administrative ability to meet all requirements of government grants?
    • If your funders do not allow overhead in grant proposals, consider billing employees by the hour.
  • Be clear about restricted funds when budgeting.
    • Multi-year grants are booked in the award year, but make sure the 2nd and 3rd years of funding are included in their respective annual budgets.
      • Can show funds released from restrictions as prior year income, but this will affect mid-year comparisons.
      • Can add a budget column to the income statement.
    • For a cash budget, add a cash adjustment column
      • Take out non-cash items (depreciation, in-kind)
    • Note any use of board designated reserve funds in your budget.

Interested in Learning More?

View our Resource Collection or check out the Discussion Archive for notes from other Financial Management Networks.

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