Not-for-Profit: Managing Money with Strings Attached

Since time immemorial not-for-profit entities have had restrictions on the use of certain monies received, be it from a capital campaign, through grants awarded, or endowments gifted to them. With the onset of the COVID-19 pandemic there has been an increase in the amount of government funding, including grants. Making sense of how they impact your financials and effectively managing those funds are important in keeping a possible blessing from becoming an administrative curse.

What are restricted funds? From an accounting perspective they had previously been called unrestricted, temporarily restricted, and permanently restricted, while in recent years the terms have changes to without donor restrictions and with donor restrictions. They represent funds received by a not-for-profit organization for a specific use, or a restriction. It is the external source of the funds, be it a donor or grantor, which places any restrictions on the funds.

A common example of donor restrictions is a charitable organization running a capital campaign for a new building. The charity will make an appeal to potential donors by marketing the new building and its benefits to the organizations and its cause. An individual may then make a donation towards the construction or purchase of the new building either by indicating on the memo of their check or envelope or by specifying the purpose of the donation through the organization’s online portal.

All of the funds received this way must now be tracked by the organization so its management and board know how much they are now obligated to spend on the new site. On an audited balance sheet, this “building fund” balance will be presented in the net assets (equity in for-profit parlance) section and will be referred to as net assets with donor restrictions. For the charity in this example, on their income statement this will appear initially as an increase in net assets with donor restrictions.

Managing these funds can be complex, especially if an organization has limited experience with dealing with restricted funds. One way to help would be letting your accounting software automate a lot of the process for you. This can be done through the utilization of cost centers, sometimes called classes. When contributions come into the organization, making sure those transactions are tagged for their purpose and do the same thing with expenses related to that purpose. This will help those charged with governance know how much of the cash on hand is really for a specific use.

Morrison has helped a number of not-for-profits in navigating restricted funds, be it with grant reporting or managing cash flow while accounting for potential large sums of cash that may not be available for operations. See our cover article in our quarterly newsletter featuring Associated General Contractors of California.

About the Author 

Dean Pritchett is a consultant with Morrison, working primarily in our Business & Accounting Advisory practice. To get in touch with Dean, please find contact information for Morrison here.


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