Your Unrestricted Funds Need Stewardship, Too

Since she signed the Giving Pledge in 2019 and began her momentous campaign of organization-changing donations, MacKenzie Scott has given away more than $17.3 billion. All in unrestricted funds with no reporting necessary.

While Scott is far from the first to focus on giving major gifts with no strings attached, the scale of her philanthropy is causing many funders to rethink long-held beliefs about what requirements should be paired with a donation.

While nonprofits will hopefully see an increase in unrestricted funds—and a decrease in burdensome reporting requirements—as part of this and other movements, good nonprofit accounting principles still apply.

Even though unrestricted funds don’t have mandates on how they should be spent, tracking and reporting on them is still important for both your donors and for your organization’s financial decision-making.

Restricted vs Unrestricted Funds 

Nonprofit organizations receive funding that typically falls into two buckets: restricted and unrestricted.

What Are Restricted Funds?

Restricted funds are donations or grants that can only be used for the purposes specified by the funder. For example, a food bank may receive donations specifically for their program providing food for school-aged children. Or a major donor may provide funds specifically for scholarships or building a new wing for a hospital.

Many grants, especially federal and state grants, are restricted. They come with some level of reporting requirements to show the money was spent the way it was supposed to be spent. These grants typically have goals associated with them—the foundation has a specific mission, or the government grant wants to address a specific societal issue. So, the organizations behind the grants use the reporting requirements to make sure the funds go towards addressing those impact areas.

Restricted funds often outline what they will fund and what they won’t. Many don’t cover operating costs or have a small allotment for indirect costs such as salaries, insurance, and utilities. And not honoring donor intent can cause your donors to lose trust in you and not donate again, or in some situations, cause legal and financial consequences.

What are Unrestricted Funds?

Unrestricted funds can be used at the nonprofit’s discretion, where the organization needs it most. They don’t come with any direction or reporting requirements. A lot of individual donations, like ones that come through your organization’s website or through the Annual Fund, are often unrestricted.

These can be used to pay operating costs such as rent, utilities, and salaries. They can also be used for program-specific costs. For example, a senior care nonprofit can use unrestricted donations to purchase supplies for activities, cover an increase in transportation costs, or hire a memory care specialist to help them expand their services. The organization gets to decide what would be the best use of the funds and their area of greatest need.

The Growth of Unrestricted Donations

Restricted funds aren’t inherently bad. An organization might do a fundraising campaign specifically for new equipment or apply for a grant that aligns clearly to their goals. But when most of an organization’s funds are restricted, often unnecessarily, it can create significant cashflow problems and inhibit growth.

For years, nonprofits and funders have operated on the premise that success means keeping operating costs—like salaries and marketing—low. The more money that went to services, the better. So many donors and funding organizations put restrictions on how gifts should be used, often focusing on services at the expense of operating costs.

Squeezing operating costs so tightly can limit the organization’s effectiveness. It doesn’t have the money to pay comparable salaries, develop scalable infrastructure, or market its services to get more donations—which keeps the organization from being able to serve more people.

The increased call for unrestricted donations highlights the understanding that nonprofits are the best judge of how funds should be spent. It is also a reaction to decades of often burdensome reporting requirements.

In addition to the media attention surrounding MacKenzie Scott’s remarkable giving, there are other movements that also highlight the importance of unrestricted funds. One that is gathering significant momentum is Trust-Based Philanthropy.

Trust-Based Philanthropy puts relationships at the center of a donor’s giving and encourages the donor to do the research instead of having the nonprofit jump through hoops for funding. Multi-year, unrestricted gifts are one of the six tenets of Trust-Based Philanthropy.

But even without donor-driven restrictions, unrestricted funds aren’t just a blank check. There is still an expectation of transparency that’s good for both donors and the nonprofit.

The Importance of Transparency for Nonprofits

Knowing where your money went—and having the reporting to confirm it—helps you make better data-driven decisions and build more trust with your funders.

Studies have shown that more transparent organizations get more donations. Nonprofits that make it easy to see how funds were spent build trust with current and future donors. Those donors can see that the organization has a history of using donations to promote their mission—whether that’s direct program costs, salaries, or rent.

Transparency is as important for internal decision-making as it is for external trust-building. Changes in your community and demand show up in your numbers. If you aren’t consistently tracking and monitoring how your funds are being used, you can miss shifts in what your community needs from you.

As Kevin Starr, director of the Mulago Foundation and the Rainer Arnhold Fellows Program, wrote for the Stanford Social Innovation Review, “If you’re trying to save the world, you need numbers—metrics that are selected carefully and gathered reliably. Not too many, just enough to know accurately:

• Delivery: what you did.
• Behavior: what people did differently as a result.
• Impact: what material change came about as a result of that behavior.

If you don’t have those, you’re flying blind. You don’t know what you’ve accomplished, and you don’t have the information you need to get better at what you do.”

Creating a culture of transparency starts with clear tracking by individual program, fund, or project. Accurate and consistent accounting by fund allows for effective reporting. When you see how your money was spent—whether it has restrictions or not—you make better decisions on where you need to focus additional funds.

Fund Accounting for Unrestricted Funds

You need to be able to accurately track and manage your donations by fund or subfund so you can provide clear reporting for all your income streams, restricted or unrestricted. That starts with a fund accounting system built for nonprofit organizations.

Here are a few features that enable you to get the information you need to make informed decisions:

Integrations

Integration with your fundraising and CRM systems allows for automated and accurate data pass-through. You can see when a donation comes in and allocate it to the needs of your organization.

Segmented Chart of Accounts

A segmented chart of accounts makes it easy to follow a fund all the way from donation to invoice so you can clearly see how the funds are being allocated. It also simplifies your account string, making your chart of accounts more streamlined and easier to understand.

Detailed Reporting

Because you can track your funds by project, you can build intuitive reports and dashboards that show impact. You can create presentation-ready charts that visually show what funds were spent, how they were used, and how that has changed over time. Not only does this help you budget and forecast better, but this information also makes creating annual reports and website updates easier.

View-Only Access

Transparency starts with your internal stakeholders. Provide view-only access to share reports with your leadership, your marketing and communications team, and your Board of Directors so they can see the impact you are making. This helps your auditor verify the work you are doing, as well.

Multi-Year Tracking

Programs don’t stop when your fiscal year ends. You want to be able to show your impact over time, so you need a fund accounting system that can track funds across multiple years.

Don’t Settle for Commercial Accounting Software

On the surface, unrestricted funds are easier to manage than restricted funds. You don’t have the reporting requirements and donor intent to track. But even if most of your revenue comes from unrestricted sources, your nonprofit still needs to diligently track and report on the impact of those funds. Commercial accounting systems don’t have the tools your nonprofit needs—like fund-driven tracking. Avoid the workarounds and choose a fund accounting system that is built specifically for nonprofits to help you be more transparent and make better data-driven decisions.

Ready to see how a fund accounting system can simplify how you track your unrestricted funds? Join us for a product tour of Blackbaud Financial Edge NXT.