Restricted vs Unrestricted Funds: 5 Simple Tips for Nonprofits
Updated: Oct 9
Most nonprofits I review have grant money in the WRONG place.
It is not because people are careless. It is because no one showed them how to track it. And many of the blogs they read are not helping.
I have done nonprofit books for 13 years. Here is what I wish every board and every bookkeeper knew about restricted vs unrestricted funds.
What Are Restricted and Unrestricted Funds?
Every dollar your nonprofit gets falls into one of two groups.
Without donor restrictions. This is money you can use for anything your nonprofit does. Rent, payroll, phones, and lights all count. Most small gifts and event money land here.
With donor restrictions. This is money the donor gave for one thing. It might be one program, one place, or one time frame. You can only spend it on what the donor asked.
That is it. Two groups.
The Old Words You Should Stop Using
A lot of blogs still say "temporarily restricted" and "permanently restricted." Those labels are out of date.
The accounting rule makers (FASB) changed them in 2016. The new rules started with 2018 reports. Now there are only two labels: "with donor restrictions" and "without donor restrictions."
Why does this matter? Your auditor will use the new words. Your Form 990 uses the new words. If your reports still use the old ones, it tells people your books may be behind too.
Tip 1: Read the Gift Letter the Day It Comes In
Do not wait until year end. Read every gift letter and grant agreement the day you get it.
Look for these signs that the money is restricted:
It names a program, like "for our summer reading camp."
It names a place, like "for the east side food pantry."
It names a time, like "for use in 2027."
If the words are not clear, email the donor within 7 days and ask. Save their answer with the gift letter. That one email can save you hours at audit time.
Tip 2: Give Every Restricted Gift Its Own Class in QuickBooks
This is the step most groups skip.
In QuickBooks, turn on class tracking. Then make one class for each restricted grant or gift. One grant, one class.
Now every time you record money coming in or going out for that grant, you tag it with that class. When the board asks, "How much of the ABC grant is left?" you can pull the answer in about 30 seconds.
Without classes, someone has to dig through every bill by hand. That is slow, and it leads to mistakes.
Tip 3: Release the Money Every Month
When you spend restricted money on the thing the donor asked for, the restriction is met. Now you need to "release" it. That means you move that amount from "with donor restrictions" to "without donor restrictions."
Do this every month, not once a year.
Most groups I see forget this step for 6 to 12 months. Then their reports make it look like they have far more restricted money than they really do. The board makes choices based on the wrong numbers.
A simple monthly journal entry fixes this. Keep a short note with each entry that says which grant it was and what the money paid for.
Tip 4: Spend Restricted Money First When the Rules Allow It
If you have restricted money for a program, and you are paying for that program, use the restricted money first.
Why? Your unrestricted money is your most useful money. It can pay for anything. It covers rent, payroll, and surprises. You want to keep as much of it ready as you can.
Always check the grant terms first. Some grants have their own rules about timing or matching funds.
Tip 5: Check It Every Month
Once a month, compare two numbers:
The restricted balance in QuickBooks.
The balance on your grant tracking list.
They should match to the penny. If they do not, find out why that same month. A small gap is easy to fix today. A year of small gaps is a big mess at audit time.
What Happens If You Get This Wrong?
Here is what I have seen happen to nonprofits that do not track restricted funds well:
Audits take longer and cost more.
The board thinks there is more free cash than there really is.
Grant reports do not match the books.
Donors lose trust and stop giving.
The good news is that all of this can be fixed. And the fix is not hard once you have a simple system.
Quick Checklist
Use the new labels: with and without donor restrictions.
Read every gift letter the day it comes in.
Make one QuickBooks class for each restricted grant.
Release restricted money every month.
Spend restricted money first when the rules allow it.
Match QuickBooks to your grant list every month.
Get a Free Restricted Funds Review
Not sure if your restricted funds are right? I can help.
I will do a FREE restricted funds review of your QuickBooks file. I will check your classes, your releases, and your balances. Then I will tell you what is right and what needs fixing. No strings.
Revamp Your Finances LLC has helped nonprofits with $500K to $5M in yearly revenue for 13 years.
Email me at markus@revampfinances.com or call 317.983.3980 to set up your free review.
Want Help With Your Books?
Get a free QuickBooks Health Checkup from Revamp Your Finances. I will look at your books and tell you what to fix.
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