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one of the things you quickly learn when starting and operating a non-profit is that you have to handle money wisely a non-profit like any business you got to make ends meet well sometimes that means moving money around from one account to another but what happens when a donor designates their gift to a specific purpose can it then be used for a different purpose later on well in today's video we're taking a look at a very critically important topic restricted funds [Music] hi i'm greg mcrae founder and ceo of foundation group and welcome once again to our 501c3 university channel today's topic is very misunderstood by a lot of organizations and that's restricted funds here's a question for you in all your efforts to keep your program running strong could it be that you're misappropriating funds without knowing it is it possible that you may be violating regulations that govern the use of donations if you don't understand the rules regarding restricted funds you might be unfortunately we see non-profits get this one wrong a lot most of the time it's an honest attempt to be a good steward of the money people have donated with completely innocent and positive intent they wind up acting in a manner that is totally against the rules you're short on cash here but you got money there just move it well that's not how it works for example suppose things are really tight at the local homeless shelter there's not enough cash in the general operating fund for the upcoming christmas dinner however there's several thousand dollars sitting in the construction fund the food is a far more pressing issue and you're not going to start the new edition for at least another year can't you just move the building fund money over to the operating account to buy the food it seems like the wisest choice you have right maybe maybe not it all hinges on whether or not those funds are considered restricted a restricted fund is money set aside for a particular purpose by way of designated giving and more on that part in a minute sometimes these restrictions are temporary meaning the restriction could end due to a specified time limit or maybe the completion of a project a permanent restriction is meant for projects or activities that are ongoing and have no set time limit you also see permanent restrictions with gifts to endowments where the principal stays invested usually forever write this part down restricted means restricted this is not a trivial matter donors can actually take legal action against a non-profit they believe is misusing restricted donations and the last thing your charity wants is to be in the crosshairs of the state attorney general's office so what are unrestricted funds well unrestricted funds don't have strings attached by a donor and may be used by the nonprofit for whatever purpose is necessary general operating expenses projects whatever the next question we need to answer is how does money get restricted well we hinted at it earlier and here it is only a donor can restrict funds by designating all or part of a contribution to a particular purpose we often see nonprofits set aside money to be used for a particular purpose and then track those funds as if they're restricted now stay with me here because this can get this can get really tedious it's perfectly fine to budget money for a purpose and even move those funds into a protected account but restricting the use of funds is not the same as restricted funds i know it sounds like a game of semantics but it's really not this is why it's so important for non-profit leaders to understand legal definitions not just learned lingo again only a donor can apply restrictions to gifts those gifts may be received in response to a specific solicitation campaign or they could be offered by a donor without any prior targeted solicitation here's a tip when you want to allocate unrestricted funds to a particular purpose call it a set-aside a protected fund or even a budgeted fund anything but a restricted fund words have meanings my friend going back to actual restricted funds now these donations could be solicited by the charity or unsolicited and a solicitation means that your non-profit asked for donations for a particular purpose maybe it was a letter mailing an email campaign or a promotion on your website donations given in response to a direct solicitation are to be dedicated to that solicited purpose in our homeless shelter example the board cannot simply redirect the use of restricted money in the building fund to be spent on food no matter how dire the circumstances assuming those funds were given with restriction unsolicited designations are restricted gifts where the donor specifies the use of the donation without having been solicited specifically by the charity let's say for example that bob gives a hundred dollars to our shelter but on his own decides to designate those funds to be used exclusively for future construction can the shelter legally divert that money to its food fund later no it can't if the organization agreed to bob's designation at the time of the gift then it's a restricted gift one way to look at it is this donations become restricted when both parties agree to the restriction in our example we're assuming the shelter accepted bob's designation that makes it a restricted gift but is there a way to accept a designation but still retain the ability to have expenditure flexibility yes there is and i'm going to explain how to do that the first way is to provide a disclaimer to donors on the front end that is clearly informing donors that the non-profit reserves the right to use money as it sees fit or if it's a budgeted restriction let your donor know that any funds over and above the budget of the solicited purpose will be put into the general operating fund make sure your donation receipt reiterates that disclaimer it's important to point out that disclaimers don't always work you may find that qualifying such things on the front end could discourage donors from supporting an expense that you're fundraising for if they don't have confidence that you're actually going to use it for that purpose you got to be strategic when using disclaimers another way to retain expenditure flexibility is by getting donor permission later on to repurpose those restricted funds now most of the time donors will agree when it makes sense keep in mind that donors have the legal right to say no and we have seen donors refuse to allow their gifts to be repurposed in these situations charities may have to refund the donation if it cannot be used for the original intended designation i think by now you're understanding why the subject of restricted funds is such a big deal so too is the tracking of restricted funds from an accounting perspective it's not a simple matter most accounting software packages are not specifically designed for non-profit use and very few have the built-in ability to track restricted funds there are creative workarounds but it is not easy to do even if you happen to use accounting software that can track restricted funds the accounting rules associated with it it's complicated we rarely see it done correctly by those non-profits trying to track it on their own for that reason alone most non-profits with any restricted fund activity should seriously consider outsourcing their bookkeeping to a professional foundation group provides full service bookkeeping for non-profits so get with us if you need help handling the finances of a non-profit is always a challenge knowing what constitutes restricted funds and then handling them correctly is absolutely crucial to staying in good standing with the law and in good relations with your donors well that's it for this episode if you liked this video please click the like button as it really helps us out go ahead and subscribe if you haven't already and click the little bell icon to be notified of new videos when we post them thanks for watching and we'll see you next time [Music] you