In the not-for-profit industry, any funding is good funding.

However, while no charity would ever turn down money from a donor, it’s true that non-restricted funds are favoured by charities, simply because those funds can be directed to multiple areas, depending on where they are most needed at the time.

This was evidenced in a 2018 study from consultancy nfpSynergy, who found that one in five charities would trade in a £1m restricted grant to get just half as much unrestricted income. The research further revealed that the smaller the organisation, the more willing they were to trade down for unrestricted income.

For charity professionals, restricted funds do pose several challenges.

Allocating resources

For leaders in the not-for-profit sector, the findings from nfpSynergy will come as no surprise. As welcome as any donation maybe, the specific purpose or project restricted income is allocated to doesn’t always align with the immediate operational needs of a charity. They may have streams of income, but without money in the bank and the proper allocation of resources, a charity will naturally struggle to stay afloat.

If they are to achieve their potential, charities grappling with restricted income must be smart in how they operate so as to minimise overheads and enhance efficiency. With the right accounting solution, charities can gain a full overview of their income-restricted, designated and unrestricted – enabling them to make well-informed financial decisions when it matters the most.

Ensuring transparency in accounts

According to the government’s Charity Scope of Recommended Practice, the differentiation of restricted funds is an essential feature in the presentation of a charity’s statement of financial activities (SoFA). The need for transparency is understandable – if a donor gives money towards a specific cause, charities must be able to show that the funds have been allocated to those purposes.

With stringent regulations in place to protect the interests of donors and the public, it has never been more important for charities to employ impeccable record-keeping and financial management. Without the in-house capabilities, it’s a headache waiting to happen.

Keeping track of income and expenditure

From beneficiary gifts and legacies donated for a specific purpose, to emergency appeals and grants given to fund projects, charities that have a large sum of restricted income from a multitude of sources have the task of keeping restricted, unrestricted and designated funds separate at all times and ensuring impeccable financial management.

For many charities, reporting income and expenditure per fund can prove challenging. This, when coupled with the constant need to meet reporting demands from donors and regulators can leave resources stretched thin and unable to dedicate as much time towards mission-critical tasks.

Increasingly, charities are learning the benefits of accounting software designed for the not-for-profit sector that combine the functionalities for core accounting with donor and fund management. By adopting a solution that automates a number of core processes, your team is free to focus on furthering your cause, raising awareness and making a difference.

Want to find out how you can configure your finance systems to generate the reports required by the charities SORP? Book a demo today.

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