Restricted funds are complex, but MissionGranted makes managing them simple so you can focus on your mission.
January 22, 2025
Managing restricted funds is one of the trickiest challenges for nonprofits organizations. Mismanagement can lead to compliance risks, financial instability, or even legal action. So, what exactly are restricted funds, and how can you ensure they’re managed correctly? Lets break it down -- and find out how MissionGranted can revolutionize how you financially manage grants.
What are restricted funds?
Restricted funds are donations or grants given with specific conditions – like funding a new program, supporting scholarships, or investing in a endowment. These restrictions are legally binding, and failure to comply can lead to donor dissatisfaction, legal consequences, or loss of trust.
Contributions are restricted if they are given with conditions that specify a purpose for which the funds must be used or the amount of time in which the funds must be expended. Restrictions are defined in the gift instrument which is the document that establishes the conditions of the donated funds. The gift instrument can range from a foundation award letter to a note from a donor.
Restricted funds are referred to as “with donor restrictions” in the organization’s financial statements and can be temporarily or permanently restricted. Temporary donor-imposed restrictions can be satisfied by the passage of a defined period of time or by performing defined activities. Sometime the donor-imposed restriction can be made with the intent of restricting the contribution forever. An example of this type of permanent restriction is a contribution to an endowment where only the interest and investment returns on the contribution may be used.
When your organization receives notification of an irrevocable commitment for a restricted contribution, you are required to record the entire amount of the commitment that year, even if the money has not been received yet or will be distributed over several years. Many times, the recognition of restricted revenue occurs in a different year than the expenses actually occur. This adds significant complexity to financial accounting practices.
How do I manage restricted funds?
You are not required to place restricted funds into a segregated bank account, but you must account for these funds separately in your accounting system and financial statements. When budgeting, best practice dictates that restricted and unrestricted funds be separated so that the money can be allocated to expenses appropriately.
When a donor defines a restriction on their contribution, the organization is duty bound to spend the funds as requested. Since restricted funds are governed by law, a donor can initiate legal action and demand the return of funds if they are not used for the intended purpose. The donor may also report the organization to the Office of the U.S. Attorney General which may result in legal consequences or fines.
Managing Restricted Funds: Best Practices
Track Funds separately: Use your accounting system to clearly separate restricted and unrestricted funds.
Budget Strategically: Incorporate restricted fund allocations into your annual budget, ensuring you meet donor conditions and recognize restricted revenue correctly.
Stay Compliant: Regularly review expenditures to confirm they align with restrictions.
Create a ‘Release From Restriction’ GL Account: This allows you to recognize revenue appropriately as restrictions are met.
How MissionGranted can help simplify restricted fund management
Managing restricted funds doesn’t have to be overwhelming. MissionGranted’s smart compliance technology makes it easy to:
Budget Accurately: Automatically track restricted and unrestricted funds, ensuring your budgets are aligned with donor conditions.
Ensure Compliance: Get monthly alerts when expenses are unallowable, reducing the risk of non-compliance.
Streamline Reporting: Recognize multi-year grant revenue appropriately, so your financial reports are clear and accurate.
With MissionGranted, you’ll gain peace of mind knowing your organization is compliant, efficient, and equipped to manage restricted funds effectively. Ready to simplify your grant management? Learn More.
Managing restricted funds can be daunting, but the right tools make all the difference. MissionGranted empowers nonprofits to stay compliant while focusing on what truly matters – your mission. Ready to take control of your grant management and compliance? Request a Demo today!
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