Different Types of Restricted Funds for Nonprofits and Governmental Organizations

Nonprofit and governmental organizations often receive donations and grants that are restricted to being used for specific purposes. These restricted funds can be a valuable source of funding for organizations. However, it is important to understand the different types of restrictions and how to manage them properly. This is where astute and sound non-profit financial management knowledge comes into play.

Types of Restricted Funds

There are two main types of restricted funds: temporarily restricted funds and permanently restricted funds.

• Temporarily restricted funds must be used for a specific purpose, but the restriction expires after a certain period of time or when the purpose is achieved. For example, a donor may give a gift to a nonprofit organization to be used for a specific program or project. Once the program or project is completed, the organization can use the remaining funds for any purpose.
• Permanently restricted funds must be held in perpetuity and used for a specific purpose. The principal of the fund cannot be spent, only the interest or income that it generates. For example, a donor may give a gift to a nonprofit organization to establish an endowment fund to support a specific program or scholarship. The organization can only use the interest or income from the endowment fund to support the program or scholarship.

Other Types of Restricted Funds

In addition to temporarily and permanently restricted funds, there are a number of other types of restricted funds that these entities may encounter. These include:

• Designated funds are donations or grants that are restricted for use on a specific program, project, or activity.
• Endowment funds are permanently restricted funds that are invested to generate income to support the organization’s mission.
• Grant funds are funds that are awarded by a foundation or government agency to support a specific project or program.
• Programmatic funds are funds that are restricted for use on specific programs or services.
• Quasi-endowment funds are permanently restricted funds that are not invested, but are instead used to support the organization’s ongoing operations.
• Revolving loan funds are funds that are used to provide loans to individuals or businesses. There is an expectation that the loans will be repaid and the funds can be used to make new loans.
• Sinking funds are funds that are set aside to pay for a specific expense in the future, such as a building renovation or debt repayment.
• Trust funds are funds that are held in trust by a third party for the benefit of a nonprofit organization.

Managing Restricted Funds

Nonprofit and governmental organizations must carefully manage restricted funds to ensure that they are used in accordance with the donor’s restrictions. This includes:

• Keeping accurate records of all restricted funds. Organizations should track the source of each restricted fund, the restrictions on its use, and how the funds have been spent.
• Using restricted funds only for their intended purpose. Organizations should never use restricted funds for any purpose other than the one specified by the donor or grantor.
• Investing restricted funds prudently. Organizations should invest restricted funds in a way that is consistent with their fiduciary duty to the donor or grantor.
• Reporting on the use of restricted funds to donors and grantors. Organizations should provide regular reports to donors and grantors on how their restricted funds are being used.

Conclusion

Restricted funds can be a valuable source of funding for nonprofit and governmental organizations. However, it is important to understand the different types of restrictions and how to manage them properly with high-level non-profit financial management expertise. By carefully managing restricted funds, organizations can ensure that they are used in accordance with the donor’s wishes; and that they support the organization’s mission.

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