Understanding Restricted Funds: A Guide for Nonprofits
- Lyle Mustard
- 4 minutes ago
- 4 min read
Running a non-profit organization sounds so focused - you exist to serve the community in a very specific way.
You are a laser beam of operational clarity. ⚡
Unfortunately for you, a business is a business, and it comes with all the same overhead as any other.
Rent — what a world it would be without housing costs, hey? 🏠
Utilities — a business needs to keep the lights on and the toilets flushing. 🚽
Labour — oh, holy goodness, that’s usually the bear in the budget room. 🐻
And you think, hey, no problem, there are always grants floating around looking for a worthy cause to fund.
But wait!
It’s almost always the case that your biggest funders come with the biggest sets of conditions, rules, and expectations.
These are what we call Restricted Funds.
Restricted Funds: What Are They?
Roughly speaking, there are two kinds of funds: restricted and unrestricted.Fortunately, they are just as they sound.
Unrestricted: funds that don’t have any rules tied to them.
--> Get the money -> spend the money -> enjoy! 🎉
Restricted funds: this is money that comes with specific expectations because it is delivered for a specific purpose.
Did I say expectations? Make that requirements.
If you receive a grant to buy bicycles for children in a certain neighbourhood, you’d better be sure your receipts are for bicycles and prove that you delivered them where you said you would.
Why? Well, for example:
If your office water heater exploded and soaked the pies you left cooling on the windowsill, that’s an urgent matter.
You need that water heater to operate.
And those pies. 🥧
To enjoy pie.
I understand. Do you know who doesn’t understand?
Your restricted funder.
It doesn’t matter how much the failed water heater affects your ability to operate. Or how delicious those pies were. Those funds are for bicycles.
Even if you buy a water heater from a business cleverly named “The Children’s Bicycle Water Heater Company,” that still doesn’t count. 🚫🚲💧
Restricted funds are exactly what their name describes: restricted to their defined terms.
When you’re running your business and bogged down by operational costs, it seems like the funder should understand if you make a few little expenses here and there. Just a little bit. To keep the business running.
Otherwise, those kids definitely won’t get their bikes.
I mean, really. How much does that matter?
Good question.
Restrictions and Compliance: Why Does It Matter?
It’s tempting to think you can find some flexibility in those stacks of cash, but there are a myriad of reasons why that’s not the case - and why it matters.
Following the terms of a restricted fund does a few things for your organization:
1️⃣ The restrictions are not a suggestion.
They are terms of compliance in a contract.
Fund restrictions are guardrails to ensure the funder’s objective is met.
They aren’t giving the money to you; they are trusting you to put their money to work for them.
If you give money to your friend to buy you a chocolate bar 🍫, it’s because you want to eat a chocolate bar.
If they come back and tell you they bought and ate a cupcake 🧁—but it’s okay because your money still bought a dessert—then they missed the point.
And if you think your funder will just say, “Ah, well, maybe next time,” then you’re dreaming.
There will be no next time.
And, typically, you will have to give that money back to them.
The money you have already spent. 😬
So… good luck with that.
2️⃣ It builds trust when you do it right.
They’re the few funders providing the majority of your funding.
You want them to like you.
You want them to trust you.
To think you’re cool because you do what you say. Because they had a dream, and you made it come true. 🌱
When you spend their money on whatever you think is important and assume you can sweet-talk them into changing their mind, you’re in for a sour surprise. 🍋
It won’t stop there—once you get a reputation as an organization that can’t be trusted, you’ll find that your grant applications will all follow with rejection letters.
Restricted Funds: How to Manage Them
You’ve secured some funds and promised that you’ll handle them like a pro.
How? What do the pros do?
✅ Budget them first.
When you’re making a budget and forecasting cash flow, plan out and set aside your restricted funds first.
Get them off the table to make sure they stay in their designated area.
If you’re headed to the grocery store to get $200 worth of meal planning supplies, but you stop along the way and spend $45 on gas and $3 on a chocolate bar because your friend never got you one…You’re going to be disappointed when you’re trying to pay at the checkout. 🛒
Schedule that money—and then pretend it isn’t there.
That way, when you need it, it will be.
✅ Use your tools to keep the plan on track.
Whatever bookkeeping software you use, make sure restricted funds are tagged and categorized properly so you don’t confuse them with anything else. 📊
Keep a tight handle on any expenses you make for that fund.
Don’t let it get mixed in with the other, less cool money.
While you’re at it, perform some micro audits along the way.
Make sure you’re not dipping your ladle into the wrong soup pot. 🍲
Check your expenses and make sure each one matches the right fund.
Keep everything in its right place.
In a Nutshell…
So, what are restricted funds? Well, now you know.
Which is good. Because you’re going to deal with them often.
🔁 Remember:
Restricted funds are for a specific purpose and must be used according to the funder's terms.
You want to follow those terms so that you don’t misspend and owe them all back after they’re gone.
You want the funder to trust you - and give you money again next year.
🗂️ So plan early, use your software to keep everything categorized and tracked, and check in often.
💬 Your Turn!
Have you ever had to navigate tricky restrictions on a grant? What helped you stay on track?
Drop a comment below—we’d love to hear how your organization keeps things organized. 🧾💡
Written by Lyle Mustard
