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Too Many Restricted Funds in Your Nonprofit?

best practices board finances foundation funding reporting Feb 15, 2024

    I am often asked the question, “What do we do now? We have restricted funds, but we really need that money for operations.” Well today, I'm going to address that question. If you find yourself in a situation where you have resources that are not actually available because they're restricted, you might be wondering what to do. Here's the steps to set your organization up to prevent that or to resolve that situation once you've arrived there. Since its such a common problem in nonprofits, I want to equip you with the solution today. 

 Define Your Restrictions

     First things first, you really need to define which restricted funds your nonprofit will receive. You may be wondering, “What is a restricted fund?” Well, restricted funds are gifts that are given by donors for a restricted or intended purpose, or maybe in a specific period of time. (Please note that those gifts still need to qualify as a tax exempt donation, which is a different topic for another day.)

Reduce the Number of Restrictions on Your Funding

      Ultimately, if you're finding yourself stuck with too many restricted funds, and not enough for operations or a new program, then your first step is to reduce the number of restricted funds you have. Your board should be involved in helping to decide, “Do we really need all these different buckets for money?” The strongest funding models do not rely on donations that are narrowly restricted to certain elements of the mission. Instead, the strongest funding models rely on high trust asks that focus on the impact that the nonprofit is having and invite the donors to be a part of making a difference by supporting the nonprofit.

The Mindset Behind Restricted Funds

     Typically, I find that the most narrow ask comes from a nonprofit that is actually just starting up. Why? Well, it can be scary to ask for money when you feel like you’re not giving anything in return. Instead, it’s a lot easier to feel like you're exchanging something. After all, we’ve spent our whole lives learning that exchange is the way the world actually works. If we want groceries, we have to pay for groceries, right? So, asking someone to support the mission of your nonprofit without receiving something tangible in return feels very strange, doesn’t it? All too often, fear is what motivates nonprofit leaders to ask for something so narrowly restricted that it becomes a “restricted transaction.”

Mature Nonprofits Do This instead

     On the other hands, mature nonprofits typically ask for support for the mission from a high trust position with a history of success. So if you're in a place where you already have tons of restricted funds, your goal is to start simplifying. How do you do that? 

When Restricted Giving Does Not Exceed Expenses

     First, you’ll want to evaluate whether the giving in that restricted area exceeds the expenses. So are people giving more than you're spending for that restricted purpose? If not, then change the way you raise funds. You don't need to be raising restricted funds if you're spending more than what you're getting. So don't ask for the narrowly restricted gifts. Instead, ask for mission oriented gifts that communicate, “Your support of our nonprofit helps us to fulfill the mission of _____ plan.” This type of broader ask will now give you unrestricted resources. Of course, you still ask with integrity, but begin embracing this approach as a new mindset. 

When Restricted Giving Exceeds Expenses

     Alternatively, if you are in a situation where the giving in the restricted area actually exceeds the expenses, then these gifts are actually creating profitability for growth that might help prepare you for the future. Examples include a building fund or a capital project. If this is your situation, then it makes perfect sense to be taking those restricted funds because you want them to accumulate so that when the time comes, you have what you need for that purpose.

     However,  not all surplus restricted giving makes sense. For example, if you’re receiving resources that are earmarked for a Christmas project, but Christmas costs are much lower than expenses, you’ll want to start reorienting to enlarge the ask to communicate something like, “This is a gift to help us champion our residents.” This ask is not just about Christmas, even though it can be asked for at Christmas and be Christmas themed. Again, you need to use integrity always, but begin embracing this new mindset. 

How to Manage Your Nonprofit’s Restricted Funds

     Once you've identified that you do want some restricted funds, it’s time to talk about cash management. You’ll want to make sure that your restricted funds are tracked in your financial statements. (Read more about how to make sense of a difficult financial report in this article and learn how to track restricted funds in Quickbooks with this video playlist) ) Your restricted funds do not have to be separated by bank account, although there are times when this may be appropriate,  like when the time horizon on your restricted funds is long. For example, in a capital campaign, you may be accumulating capital gifts that will be used in a five year plan for, for facility improvement. Well, in this case, you probably want to begin moving that money out of your regular cash account and into an investment tool that will match the time horizon. By that point, your board will definitely need an investment policy to guide those decisions. 

When You Need More Help With Restricted Funds

     If you are swimming in a sea of restricted funds and you're not sure what to do next, I'd love to have a one-on-one conversation with you. Feel free to book a strategic consultation with me! I look forward to serving you.

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