Understanding Restricted Funds

(bright music) - [Narrator] From time to time, you'll have donations or grants that come with a few strings attached. These could be restrictions in how the money will be used, or the time frame in which it can be used. It's important to know how these restrictions affect your budget, and how to manage these restricted funds. That's where we can help. Restrictions can only legally be placed on funds by their donors. The shape and form of the restrictions are defined in the gift instrument. And n

o, we're not talking about the saxophone you got for your birthday. Examples of gift instruments include award letters from foundations, or letters from individual donors. Many individual contributions are given without donor restrictions, as are general operating and general support grants. If there are no restrictions placed on donations or grants, then they are considered funds without donor restrictions, or what used to be called unrestricted funds. These are likely your favorite kind becaus

e you can use them for whatever is most needed. However, the second type of funds are known as funds with donor restrictions. Donors might restrict a donation or grant to use only in your new Backpacks 4 Kids program, for example. These funds include what used to be termed temporarily restricted funds, restricted to a particular use or time. They have donor-imposed restrictions that can be satisfied by either the passage of a defined period of time or by carrying out a specific program or projec

t, like the Backpacks 4 Kids campaign. Some funds with donor restrictions may be set aside for a purpose or with a time restriction that will never expire. We used to call these permanently restricted. Endowments and scholarship funds are common examples of funds with this type of restriction. They are required to be restricted in perpetuity, which is the new terminology for these permanent restrictions. Perpetuity essentially means with no end date. The intent is that the principal balance of t

he contribution will remain as an investment forever, and the nonprofit will utilize only the interest or other earnings from the investment. When planning and budgeting, be aware of any and all time and activity restrictions present on your funds. And remember, all income must be recognized or recorded in your accounting records in the year that funding is received, regardless of when the related expenses will occur. When researching and applying for grants, consider any challenges that potenti

al restrictions could present to your organization. Project or program grants are restricted for that purpose, so be aware of what you're asking for in your proposal. If you're asking specifically for donations for your Backpacks 4 Kids campaign, you may be putting restrictions on the funding. That's because anyone responding to the appeal thinks their donation is going to Backpacks 4 Kids, so that money is now restricted for that purpose. Be certain that managers and donors understand the purpo

se of contributed dollars, and understand if restrictions are present. Also, be certain that staff charged with fundraising understand that being too specific in your appeals can lead to restricted gifts. While managing restricted funds may present extra challenges to your nonprofit, diligent tracking is essential to demonstrate accountability, ensure legal compliance, and communicate that you are a good steward of the funds you receive. (bright music)