That's because, sometimes, these funds can come with strings attached. These are known as “restricted funds,” and it's critical for accounting team as well development team to understand the different types of restrictions and how they should be handled.
Furthermore, information and guidance regarding how to handle restricted funds should be shared with all team members who have access to the funds to prevent accidental misspending or allocation.
In simplest terms, a restricted fund is a contribution that has been made to a nonprofit with certain stipulations or requirements regarding how the money should be allocated or spent. There are three main types of restricted funds:
When a nonprofit accepts a donor-restricted contribution, it assumes a fiduciary responsibility to use the gift as intended. With a few different types of restricted grants to keep in mind, it can quickly become confusing for organizations to remember what each fund has been designated for and what kinds of restrictions they need to follow. This is why organizations run into so many problems with misuse of restricted funds; it's usually not intentional, but a simple lapse in judgment.
Regardless, avoiding misuse of restricted funds is critical to the long-term health and sustainability of any nonprofit and for a number of reasons.
For starters, when a nonprofit misuses a restricted fund, this can lead to major reputational damage if word gets out. Donors may no longer feel they can trust the organization to handle contributions responsibly, so they may stop making donations altogether. In some cases, funders may even have a legal basis for demanding repayment of misappropriated funds which could create further headaches.
There's also an issue of legal risk. When restricted funds are misspent, organizations could be charged with fraud, breach of contract or other offenses that come with serious implications.
The good news? There are a few simple and practical steps nonprofits can take to reduce the risk of misusing restricted funds.
First and foremost, it's important to review any written documentation that was submitted with a grant or other contribution. Often times, these gift letters will include specific language that indicates whether a contribution is restricted in some way, as well as details on the specific purpose of the fund or time restrictions that may be in place.
Make sure, too, that your organization has strict systems and policies in place when it comes to handling restricted funds. This includes a system for documenting restrictions, as well as policies regarding who has access to funds and their allocation.
Having a simple tracking system in place can also make all the difference here. Even just a simple spreadsheet document that tracks every fund and expense can go a long way in avoiding accidental misspending or misappropriation.
Of course, policies and tracking systems are only effective to the extent that everybody is aware of them and understands them. Make sure all team members who have access to funds are on the same page regarding policies and procedures, including executive directors, accounting and finance staff and all board members. Provide detailed training on navigating any tracking systems and documenting spending as needed.
Perhaps above all else, encourage team members with access to funds to always ask for clarification if they are in doubt about whether a fund can be used in a certain way. It's always better to be sure if there is any question or gray area.
With the right systems and policies in place, nonprofits can handle restricted funds properly and avoid compliance issues down the road.
If your organization doesn't already have the right protections in place, now is the time to meet with your accounting and finance team to make some changes.