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Q&A #116 – Do restricted funds need to be kept in a separate bank account?
No, it is almost never required nor advisable for a nonprofit organization to keep restricted funds in one or more separate bank accounts, and this is not an accepted best practice. The reason is that using separate bank accounts for restricted funds makes managing these funds more difficult and does not enhance safeguards or strengthen internal accounting control systems. The opposite often results. Having unnecessary bank accounts can lead to operational inefficiencies and increased chances for errors.
Time to Take a Fresh Look at Old Board-Designated Funds
In my professional life I view many financial statements from a wide variety of nonprofit organizations, and I am always amazed, but not shocked, by how many of these nonprofits have Board-designated funds sitting on their balance sheets. Two questions immediately come to mind. Why where they originally established? Is the purpose still relevant today? Often the answers lie in understanding the circumstances occurring at the time the Board originally designated the funds.
Optimizing the Use of Restricted Funds Through an Annual Inventory and Assessment
Nonprofit organizations can receive restricted funds unexpectedly or they can appear after many years of acquisition efforts. They can be fresh (just arrived) or mature (been sitting around for years). Spending patterns for restricted funds is also constantly changing. Consequently, it is important to periodically pause and take an “inventory” of restricted funds in order to assess the timing and future use of this valuable resource.
Now is the Time to Push for Changes to Non-Full Cost Funding Practices
Our recent article on the Challenges of Accepting Non-Full Cost Funding prompted compelling and thoughtful comments on the universal problem of non-full cost funding in the nonprofit sector. Many commented that non-full cost funding is a systemic problem that fuels marginalization of the communities, causes, and peoples we serve. To right this wrong, we must draw attention to these problems and advocate for change. Indeed, real sustained effectiveness cannot be achieved if this harmful funding culture continues.
The Challenges of Accepting Non-Full Cost Funding
Most nonprofit organizations are confronted with an unfair choice each year: accept or not accept critical funding that is inherently designed to not cover the full cost of programs and activities for which the funding is provided. This reality has been around for a long time. Looking to the future, we must actively push funders to recognize that sustainability will be damaged if nonprofits continue to be forced to compete for, and pressed to accept, non-full cost funding.
Q&A #8 – Should my organization create a separate bank account for PPP funds?
The answer is that you do not need a separate bank account to hold PPP funds. Having a separate bank account for PPP funds is not required and not particularly helpful. Your main priorities should be proper and concise documentation of eligible transactions, which can be achieved just as well through good accounting practices and processes.
Options and Tactics for Managing Restricted Funds During a Crisis
When there is substantial accumulated restricted funding in place and held on the balance sheet, most nonprofit organizations find themselves at great risk of inadvertently using restricted funds for purposes other than those agreed to with the donor/funder.
Q&A #4 – What options does my organization have related to restricted funds for a project that we’ve had to put on hold due to the pandemic?
Restricted funds, of course, cannot be used for purposes outside of the restrictions agreed to unless the donors/grantors consent to modify the restrictions (or, alternatively, the modifications are approved by a court). However, there are several steps you can take to get a better sense of how narrow or flexible the restrictions actually are, and to work with your donors and grantors to seek the appropriate modifications that will benefit your organization.
Top 10 Legal Action Items for Nonprofits in Light of COVID-19
While the usual legal compliance issues affecting nonprofit organizations (tax compliance, corporate governance, privacy issues, charitable solicitation registration, etc.) have not gone away, the massive wave of new legislation passed in response to the pandemic has made adapting to these new circumstances the number one legal priority for all nonprofits.