Restricted Funds for Non-Profits—A Brief Explanation
04/02/2021 | by Karis Call
04/02/2021 | by Karis Call
Non-profits, like any other organization, generate revenue in a variety of ways. Most understand how funding works when it comes from services rendered or products provided. However, revenue generated from donations or grants is often not so clear cut. These funds often come with conditions or specific time or purpose restrictions. When this is the case, these funds are considered “conditional” or “restricted.”
When a donor gives a certain amount of money with requirements attached, it is often impossible to predict exactly what an organization will need to accomplish the donors intended purpose. That is to say that a statement of purpose may not line up exactly with a timeline or dollar amount.
For example, a donation may exceed the necessary amount to fulfill a specified purpose or the funds may be used faster than a timeline specifies. What should non-profit financial managers do in these situations?
Imagine, for example, a donor provides $100,000 in funding to be used for a specific purpose. Then by year’s end, it turns out only $75,000 was necessary to fulfill that purpose. This revenue must still be recognized and matched against the expense. The excess revenue will then be classified as unrestricted—provided there are no additional restrictions associated with this particular scenario—and carried over into the next fiscal year.
If a donor provides funding for a specific purpose and also specifies they are to be used within a certain time span—say, three years—which consideration takes priority, the timeline or the purpose? As stated above, this situation is not uncommon. A donor likely does not know the ins and outs of how the money is spent or how fast. The donor’s intent takes priority here. The money may be exhausted within the first year, in which case it should be released to match the revenue against the expenses.
A non-profit that accepts donations should provide documentation that allows donors to specify specifically what gifts are to be used for and should include the ability to specify that gifts are unrestricted. Otherwise, it can be difficult to tell the difference, and it will make the auditing process more complicated. This way, a donor can easily specify which parts of the organization they wish to support, and the organization can more easily match the revenue to specific expenses.
The bottom line is that, in order to remain accountable to funding sources and to stand up to audits in good faith, restrictions must be followed as thoroughly as possible. When a donor says they want their funds to be used to purchase and distribute school supplies to children from low-income families, for example, the funding should be used for exactly that. The expenses might include the cost of purchasing supplies or the cost of staffing a school supply donation drive. Acceptable use would not include funding a counseling center for the low-income parents of school-aged children.
So long as restrictions are followed and expenses match to revenue appropriately, financial managers can have peace of mind that their audit will proceed smoothly.