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.

Nonprofits generally do a good job of managing the component parts of individual restricted funds where the focus is primarily on honoring promises agreed to with donors and meeting the requirements of awarded grants.

What is often overlooked is long-term planning – how best to optimize the use of restricted funds and incorporate this valuable resource into future budgets. To optimize the use of restricted funds you need to consider three planning metrics: time limitations, availability of other funding, and capacity. Adding an “annual inventory” of restricted funds that incorporates these three metrics into your accounting systems will help your organization to stay focused on the long-term planning dynamics of restricted funds.

An optimal date to schedule a restricted funds inventory is the end of the third quarter of your organization’s fiscal year. The end of the third quarter seems to work best for two reasons. First, information from the inventory will be highly useful in compiling the next fiscal year’s budget. Second, this schedule allows for time to assess current year restricted funds timing, consider compliance issues before the year closes, and make adjustments where necessary.

There are several ways to order your inventory list of restricted funds. You can order the list by source of funds, by purpose, or by demographic type such as by regions, country of use, or population dynamics. No matter how the list is organized, it should include three columns for time limitations, availability of other funding, and capacity.

Reserve the first column for time limitations, listing details related to time usage restrictions, sunset dates, deliverable dates for key restricted usage requirements (such as performance benchmarks and research publication dates), and whether time extensions are allowable.

The middle column list notes related to availability of other funding that is analogous in nature and not previously committed. Cross-reference both within the restricted funds inventory and to other sources of unrestricted funding such as designated unrestricted reserves, membership dues and assessments, and unrestricted contributions from appeals and fundraising events. Also, reconcile net assets with donor restrictions in the general ledger with your inventory of restricted funds to make sure all restricted funds are accounted for and included.

Save the third column for capacity notes and comments. In the rush to attract restricted funds, constraints related to capacity often go unnoticed. The restricted funds inventory is a good place to document when staff or assisting third parties will be available to complete a restricted project. Here it is also important to cross-reference to other projects (both restricted and unrestricted) that need to be completed to free up staff. Capacity can also be funding related, as happens when there are matching funds or co-funding requirements that must be completed first.

Planning Tip – For nonprofit organizations with significant long-term unrestricted funds, it is best to prepare an aging schedule for expected use. Separate the aging schedule into three pools, near-term (1 to 3 years), middle-term (4 to 7 years), and long-term (held back and not available for spending without special Board consent). Update this schedule annually in conjunction with the operating budget preparation cycle.

After the unrestricted funds inventory is initially completed, plan to circulate the results to senior management, Board members, project managers, and staff for their comments and observations. Their input will enhance planning and raise awareness of possible timing and capacity issues in the future.