Receiving financial support for your nonprofit is always welcomed; however, if you get money from different sources, it may not always be easy to manage. You may receive funds that are to be used only for specific purposes or during particular times. You may receive a check that you aren’t allowed to spend. As you receive money for your nonprofit, be aware of the different types of restrictions placed on the revenue.
Some donations you receive can never be used. This intentional permanent restriction means that although the money is legally owned by the nonprofit, you must set these funds aside, as they are not to be spent. The permanently restricted funds should be used as an investment, and any residual income, such as interest, can be spent. These restrictions are often called endowment funds.
Temporarily Restricted – Time
You may receive other donations that you can only spend after a certain amount of time. This means you have to wait until a certain date (cannot be spent before January 1 of next year) or passage of time (within six months). In both cases, your nonprofit is awarded money; you just have to secure, track, and ensure the funds are not spent until the appropriate time.
Temporarily Restricted – Purpose
You may also experience restricted donations tied to specific purposes. In most cases, this is tied to your mission. Donations may be restricted for certain uses only, such as purchasing canned goods (for a food shelter), vaccines (for an animal shelter), or books (for after-school reading programs). The restriction can be for administrative uses, too. A donation can be limited for the use of an administrative assistant’s salary or consulting services in development of a long-term plan.
Temporarily Restricted – Location
Another restriction you may encounter is based on location. For nonprofit entities that have multiple sites or offices, you may be limited in where funds can be used. For example, an after-school reading program may receive donations restricted for use within a specific school or certain geographical area.
For strategic and accountability reasons, you and your Board of Directors may impose restrictions on yourself. This form of earmarking certain funds should be treated differently than other restrictions. While the donor-imposed restrictions above are removed only when the restriction is met, self-imposed restrictions are not permanently binding. In reality, you can use these funds whenever you want.
Any money given without stipulations is considered unrestricted. This money can be spent in any way you want; there is no legal limit on how, where, or when you spend it. By default, any donation or grant that does not meet the qualification as permanently or temporarily restricted is considered unrestricted.
By following the rules for restricted donations and grants, you can raise awareness for your nonprofit’s cause and support its mission. This all begins with the proper management of gifts and other sources of income. Begin by recognizing restrictions placed on grants and donations, and treat them accordingly to ensure the long-term success of your organization.