Imagine this: A donor makes a generous contribution through your charities donation platform, giving you a much-needed boost for your work. You start dreaming about using it, only to realize the donor has specific instructions for their gift.

These are called restricted funds—donations set aside for a particular purpose. They can't be used for anything else, and failing to honour these restrictions could lead to serious consequences, like fines, lawsuits, or even losing your tax-exempt status.

So, how can your charity handle restricted funds the right way? Here's a simple guide to help:

1. Understand the Rules

When you receive restricted funds, the first step is understanding the donor's limitations. Knowing these details ensures you don't accidentally misuse the money.

For example, you can't automatically use the extra if someone donates $200,000 for a project that only needs $100,000.

The donor would need to adjust their restrictions, or you'd have to decline the donation. Restricted funds can come in various forms, such as:

• Program-specific gifts: Donations tied to a particular project, like tree planting for an environmental group.

• Operating expenses: Funds for rent, utilities, or other overhead costs.

• Endowments: Investments that grow over time but come with permanent or temporary restrictions.

• Grants: Donations earmarked for specific uses, such as Google Ad Grant credits for marketing campaigns.

Understanding these nuances ensures you can respect the donor's wishes while advancing your mission.

2. Track Restricted Donations

Once you've accepted a restricted gift, document it carefully in your financial records. This includes:

• Income statement: Log restricted funds separately to show which income is flexible and which is not.

• Statement of activities: Categorize revenue and expenses into unrestricted, temporarily restricted, and permanently restricted groups.

• Statement of financial position: Split assets with and without donor restrictions.

Keeping track helps your organization stay financially transparent and use funds appropriately.

3. Budget Accordingly

Restricted funds often require some budget adjustments. For instance, if a donor gives $50,000 for a project costing $100,000, you'll need to raise the other $50,000 elsewhere.

Organize your budget to align with restrictions.

For example:

• Operational costs: General expenses, like utilities, are often funded by unrestricted donations.

• Fundraising costs: Expenses for campaigns or events to attract more donors.

• Programs: The direct costs of your work, such as providing veterinary care at an animal shelter.

If a restricted donation only covers one program, you may need to fundraise more for other expenses. On the flip side, restricted gifts for operations can free up unrestricted funds to support new initiatives or build reserves.

4. Share the Impact

Transparency is key. Let donors and stakeholders know how restricted funds are being used and the difference they're making. You can share this through:

• Your website: Add a page explaining how restricted funds work and where donors can help most.

• Annual reports: Highlight the impact of restricted gifts with stories and data.

• Social media: Post updates with stats or visuals about how these funds support your mission.

If restricted donations make up a big part of your revenue, consider creating a dedicated report to showcase how you honour donors' intentions.

By carefully tracking and budgeting restricted funds, you can meet donor expectations and strengthen your charity's impact.

Work with your team to align your finances, and you'll ensure every dollar serves its purpose—advancing your mission.

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