Nonprofits: Not All Funds Are Created Equal

Nonprofit organizations typically depend on a variety of funding to keep them alive and well. They need funds to pay their bills, pay their staffs and pay for the costs of running their programs. But savvy nonprofits know that not all that’s green has equal value and flexibility. Types of funding vary greatly in how they can — or cannot — be used.

Understanding the types of gifts

Your nonprofit should decide from the onset what type of funds it wants to solicit, and what types it’s willing to accept. Here are the three main categories to consider:

Permanently restricted funds. Often called endowments, these funds are subject to lasting donor stipulations, which mandate that the funds be “held in perpetuity.” The donor can limit earnings to use for a specific purpose or allow them to support operations.

Temporarily restricted funds. These gifts are subject to donor-imposed stipulations that can be removed with the passing of time or when spent for the purpose intended by the donor.

Unrestricted funds. These funds are free of donor stipulations. Board-designated funds are included in this category. Although the board has decided to use these funds for a certain purpose, it can “undesignate” the funds at a future date.

Pursuing what works best

Charitable organizations need cash to carry out their daily operations and unanticipated costs. Thus, having an adequate and steady stream of funds without strings attached — unrestricted funds — is the best way to keep a charity’s operations and programs strong and sustainable.

Unlike temporarily or permanently restricted funds, unrestricted funds can be used to cover the cost of operating expenses, such as rent, utilities, salaries and other day-to-day expenses. The grants and individual donations a nonprofit receives for general operating support allow management to refocus its efforts from raising funds to improving programs and responding to emerging community needs.

Facing public opinion

Before an organization sets out to solicit unrestricted funds from individual and corporate donors, it should understand what it’s up against: There’s a public sensitivity toward nonprofits that spend too much money on administrative costs and too little on programs that fulfill their missions.

To secure funds without restrictions, prove to donors that you’ll use their money wisely. One way to do that is by presenting a healthy program service expense ratio and results-focused information on your Form 990, which is made publicly available.

Being straightforward with your constituents

When asking for unrestricted funds, being direct is best. Explain in your fundraising materials how unrestricted gifts offer greater flexibility than restricted gifts and how they help ensure you have adequate funds to keep the doors open. Moreover, encourage donors to make multiyear commitments for unrestricted gifts. Having funding dedicated to future years allows management to plan with more foresight.

Ask funders to designate their donations “as unrestricted funds that help the organization.” You also might consider naming a fund after families or individuals who give only unrestricted funds. It might just help encourage contributions of this type.

Sometimes grantors, such as government agencies or foundations, require that funds be restricted to a particular program or function. If that’s the case, you may still be able to factor in an administrative component of, say, 8%–10% to help cover operational costs.

Don’t get boxed in

When contributions, large and small, shrink during tough economic times, you’ll want to have enough “money in the bank” to help you ride out the storm. Unrestricted funds offer flexibility for funding programs to meet your mission and take care of operational costs.

For details, more information and professional advice on determining the best source of funding for your organization, contact a Smith and Howard nonprofit professional at 404-874-6244.