A nonprofit may have a substantial bank balance while struggling to pay an essential obligation or improve a system it needs. The problem is not necessarily a lack of total funding. Much of the money may be restricted to other purposes or already committed.
Conversely, a grant restricted to a particular program may cover some staff salaries, financial management, and technology costs if these expenses are permitted within its approved budget.
It is therefore not enough to ask, “How much money do we have?” The question that supports sound spending decisions is:
What can each funding source pay for, how much has been spent or committed, and what will be available when it is needed?
This article explains how to answer that question, from documenting funding terms to monitoring expenditure, amendments, and remaining balances.
What Is the Difference Between Restricted and Unrestricted Funding?
Restricted funding comes with terms that specify its use, such as an educational program, equipping a center, or serving a particular group. The terms may also specify a period of use, approved budget items, or limits on reallocating funds.
A restriction may arise from a grant agreement, a donor’s instructions, or the terms of a campaign announced by the organization. Its legal effect and accounting classification depend on the documentation and the framework applicable to the nonprofit.
Unrestricted funding is not subject to an externally imposed restriction to a particular purpose within the organization’s work. The nonprofit can allocate it to its needs in accordance with its authorized purposes, delegated authority, and policies. It remains subject to expenditure approval, documentation, and oversight.
The contributor’s category does not determine the nature of the funding. An individual donor may make a restricted donation, while a major individual donor may provide general support. An institutional funder may fund a specific program or provide broader organizational support.
Determining how money can be used starts with its terms, rather than the identity of the contributor.
Distinguish Restrictions, Flexibility, and Internal Designations
These concepts are related, but they answer different questions:
| Concept | Question It Answers |
|---|---|
| Restriction on use | What purposes may the money fund? |
| Implementation flexibility | What changes do the terms permit? |
| Internal designation | What need has the nonprofit decided to support with its general resources? |
| Available liquidity | What cash will be available when payment is due? |
A grant may be restricted to a vocational training program while allowing changes to certain budget items and covering shared costs associated with delivery. Its purpose is restricted, but it offers flexibility within that purpose.
A nonprofit may also decide to set aside general donations to improve its financial management system. This internal designation should be documented, and any amendment should follow the appropriate approval process. It differs, however, from a donor-imposed restriction. Guidance from the Charity Commission for England and Wales makes this distinction: internally designated funds remain part of unrestricted funds, and the authorized governing body can review the designation.
A contractual commitment or an outstanding invoice also affects the amount available for new decisions, even when the original funding is unrestricted.
Document the Terms Before Spending Begins
Managing restricted funding begins when the nonprofit agrees to its terms and continues through receipt, implementation, and closure.
Funding terms should reach both the finance team and the project manager. They should not remain solely in the resource development team’s correspondence. A brief funding record can include:
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The funding source and amount, cash received, and amounts still expected.
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The agreement, donor instructions, or a copy of the campaign announcement under which the funds were raised.
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The purposes, beneficiary groups, and activities the funding may support.
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The permitted period of use and implementation and reporting deadlines.
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The approved budget and allowable shared costs.
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Limits on budget amendments and who can approve them.
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The rules for handling any remaining balance at closure.
The organization should distinguish restrictions on use from conditions for entitlement to funding or its disbursement. Requiring a milestone to be achieved before releasing an installment differs from specifying what the money may fund. The former may affect receipt timing and accounting treatment and should be reviewed by finance under the applicable framework.
If wording such as “program support” does not clearly address salaries, technology, or rent, seek written clarification before making commitments based on it.
Match Each Expense to a Funding Source That Permits It
When approving an expense, the nonprofit needs to confirm two things: that the expense is necessary and authorized, and that the funding source permits it.
Buying a computer may be necessary for the organization, but that does not automatically make it an allowable expense under a campaign restricted to providing meals. Part of a finance employee’s salary may be allowable under an education grant if its budget and terms cover work associated with the program.
The team can use the following questions:
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Does the expense serve the funded purpose?
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Do the terms and budget permit it?
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Does it fall within the permitted period?
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Is another source already covering a share of the cost?
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Does it require additional authorization or approval?
Changing an expense’s name or placing it under a broad budget heading does not make it allowable if its actual nature conflicts with the funding terms.
Restricted Funding Can Cover Shared Costs
Direct costs, such as materials and trainer fees, do not represent the full cost of a project. Delivery may also require accounting, procurement, supervision, technology, monitoring, and evaluation.
Restricted funding can cover a share of these costs when its terms permit. Bridgespan’s guidance emphasizes the importance of funding a fair share of an organization’s core costs as part of program support.
The nonprofit should use a clear, appropriate basis for allocating costs, such as actual staff time or usage, depending on the expense and the funder’s requirements.
If an employee works on two projects, their full salary should not be charged to both. If one source has fully funded a particular cost, the same amount should not be claimed from another.
Before estimating the need for general resources, account for shared costs already covered by project budgets. Otherwise, the funding gap may appear larger than it is, or costs may be counted twice.
A Practical Example: A Balance of SAR 600,000 Is Not All Available to Spend
Suppose a nonprofit reviews its cash position on a particular date. The following figures are hypothetical and represent cash already held, rather than future pledges:
| Item | Amount |
|---|---|
| Remaining cash from funding restricted to a training program | SAR 400,000 |
| Cash from unrestricted general donations | SAR 200,000 |
| Total cash in the bank | SAR 600,000 |
Finance reviews the program and finds that its remaining costs and commitments total SAR 350,000, including an approved share of shared costs.
This means SAR 50,000 may remain after delivery, based on the current forecast. It does not automatically become general funding. The nonprofit must review the terms, final costs, and closure requirements.
The organization also finds that SAR 120,000 of its general donations is needed for existing commitments. For this example, there are no additional designations or reserves that must be protected.
General funds available for a new decision = SAR 200,000 − SAR 120,000 = SAR 80,000.
If new unfunded needs total SAR 130,000, after excluding costs covered by project budgets, the gap is:
SAR 130,000 − SAR 80,000 = SAR 50,000.
Having SAR 600,000 in the bank does not resolve this gap. Nor can the organization cover it from the training program’s projected remaining balance without authorization that permits this use.
Management may prioritize needs, defer some expenditure, secure suitable funding, or request a permitted amendment to the funding terms. The decision depends on the need, existing commitments, and the time available.
Review Cash Timing Separately
Even when funding permits a particular expense, the cash may not arrive when payment is due.
If a grant is paid after expenditure documentation is submitted, the nonprofit needs to know how it will make the initial payment. If an installment is delayed, it should update its cash flow forecast rather than rely solely on a signed funding agreement.
The organization should therefore distinguish between:
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The agreed funding amount.
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Amounts receivable or expected to be collected.
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Cash actually received.
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Amounts spent and upcoming commitments.
Unrestricted funds are not necessarily all available for immediate spending. They may be tied up in assets or needed for future expenditure and commitments. Regulatory guidance on reserves also recognizes this distinction.
Timing should be reviewed through a cash flow schedule linking expected receipts and payments to their dates, with the certainty of each receipt clearly identified.
How Should a Nonprofit Handle Budget Amendments or Remaining Funds?
The cost of one item may fall, another may rise, or needs may change during implementation. An agreement may permit adjustments within specified limits or require prior approval.
Before acting, follow a clear process:
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Review the original terms and amendment limits.
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Identify the proposed change, its reasons, and its effects on results and the budget.
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Obtain and document the required approval.
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Update the implementation plan and financial records.
The same applies to remaining funds at closure. The terms may require repayment, allow an extension, specify another permitted purpose, or require approval for a new use.
Public fundraising campaigns also require a review of what was communicated to donors. Reaching the financial target or completing the activity does not, by itself, establish that the remaining balance is available for any purpose.
Guidance from the Charity Commission for England and Wales explains that an announced secondary purpose affects how campaign surplus can be used. Procedures vary by jurisdiction, so the nonprofit should review its wording, terms, and local requirements before redirecting funds.
Where Does Crowdfunding Fit?
Crowdfunding is a mechanism for collecting contributions. It does not, by itself, determine whether the funds are restricted or unrestricted.
If a nonprofit launches a campaign to equip a clinic, its wording and terms matter when determining permitted uses. A general support campaign should explain the needs it will cover without promising allocations the organization does not intend to honor.
Before launch, the program, finance, and resource development teams should agree on:
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What the campaign’s costs include, including fees and related expenses.
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What happens if proceeds exceed the need or fall short of the amount required.
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What process applies if the announced purpose cannot be delivered.
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What information donors will receive about the use of funds and results.
Keep a dated copy of the announcement and terms. Documentation should capture promises made to the public as well as agreements with institutional funders.
Make Monitoring a Shared Responsibility
A nonprofit can manage funding through a consolidated register. For each funding arrangement, it should record the reference to its terms, purpose, cash received, expenditure, commitments, balance, permitted period, approved amendments, and closure status.
Update the register regularly and reconcile it with the accounts. Coding funding and expenditure supports tracking. Whether a separate bank account is needed depends on the applicable terms and requirements; it should not be assumed for every arrangement.
Responsibilities should be clear:
| Role | Responsibility |
|---|---|
| Resource development | Document contribution terms and coordinate clarifications and amendments |
| Finance | Manage classification, tracking, cost allocation, receipts, and balances |
| Project manager | Monitor delivery, forecast expenditure, and report changes |
| Authorized decision-maker | Approve expenditure and amendments within delegated authority |
Each review should present four things: the permitted use of each balance, the commitments it will cover, the needs that remain unfunded, and the decisions or approvals required.
This enables the nonprofit to protect funding purposes, charge allowable costs correctly, and identify gaps before they become commitments it struggles to meet.
