Tips for Managing Restricted and Unrestricted Funds in a Nonprofit Setting

Running a nonprofit is a bit like hosting a dinner party with two very different guest lists.

On one side of the table, you’ve got your restricted funds — the guests who are very clear about what they want to eat and how you should serve it. On the other, you’ve got unrestricted funds — the easy-going friends who tell you, "Whatever you think is best!"

Managing both types of funds is crucial if you want your nonprofit to thrive, stay compliant, and avoid awkward conversations with both donors and auditors.

Here are some practical tips to keep your restricted and unrestricted funds in check, without losing your sanity.

Understand the Difference (and Make Sure Everyone Else Does Too)

Before you can manage these funds, you need to be crystal clear on what they are.

Restricted funds are donations given with specific instructions on how they must be used. Think program-specific grants, endowments, or donor gifts with strings attached.

Unrestricted funds are your dream come true. These are donations you can use wherever they’re most needed, whether that's covering rent, paying staff, or finally upgrading that dinosaur of a printer in the office.

Make sure your entire team, from the board of directors to your program managers, understands these definitions. Mismanaging restricted funds isn’t just sloppy — it can get you in legal trouble and hurt donor trust.

Keep Your Accounting Records Clean and Separate

When it comes to managing these funds, your accounting system is your best friend. Set up separate accounts or tracking categories for restricted and unrestricted funds. This makes it easy to see at a glance how much money you have available in each category.

A good rule of thumb: If a donor hands you a check with conditions, make sure you’re flagging that money properly in your system. Mixing restricted and unrestricted funds is like mixing up your kid’s college savings account with your grocery budget. Not a good look.

Budget Strategically

One common mistake nonprofits make is over-relying on restricted funds to cover day-to-day operations. Unfortunately, most restricted funds are earmarked for specific projects and can’t be used to keep the lights on.

When budgeting, prioritize unrestricted funds for general operations. Use restricted funds carefully and only for their intended purposes. This ensures that you’re not scrambling to pay staff because every dollar you have is locked up in a designated program.

If you find that you're consistently lacking unrestricted funds, it might be time to tweak your fundraising strategy to include more general appeal campaigns.

Report Back to Donors (and Do It Well)

Donors love transparency, and nothing makes them happier than knowing their money went exactly where they intended. With restricted funds, it’s critical to provide detailed reports showing how the funds were spent and the impact they made.

For unrestricted funds, don’t skip the updates just because there were no strings attached. Let donors know how their support kept your mission moving. The more informed and appreciated donors feel, the more likely they are to give again.

Prepare for the Long Game

Managing restricted and unrestricted funds isn't just about staying compliant today. It’s about building a sustainable financial model that supports your mission well into the future.

Diversify your funding streams so you're not overly dependent on either type of donation. Aim for a healthy mix of restricted grants, unrestricted donations, and earned revenue when possible. The more balanced your funding, the more freedom you have to grow, pivot, and weather the unexpected.

Closing Thoughts

Restricted and unrestricted funds each play a vital role in your nonprofit's success. Think of them as two different tools in your toolkit — each with a specific purpose, and both necessary to build something lasting.

With clear communication, solid accounting practices, and a balanced approach to fundraising, you can make sure every dollar is working as hard as you are.

And remember: When in doubt, bring in an expert. At Procuris Consulting, we help nonprofits untangle the tricky world of fund management so you can stay focused on what really matters — making an impact.