As a nonprofit organization, you’re using the method of fund accountancy rather than traditional business systems of accounting. This means you’re overseeing and distributing revenue from grants, donations, and other public or private sources to fund your organization, and your accounting practices are centered on accountability rather than profitability. Because many of the donations and grants you receive are designated for a specific purpose, one of the responsibilities you have in your accounting and bookkeeping is ensuring you’re keeping track of revenue that is restricted so that it is used properly.
Whether you have a large or small nonprofit organization, keeping track of earmarked money can be complicated, and it’s easy to make mistakes that can lead to serious problems if you’re audited. To help you keep organized and prevent complications, we’re sharing some tips on maintaining restricted funds in your fund accounting.
Understanding Fund Categories
Within your fund accounting, you’re working with both unrestricted and restricted funds. Your unrestricted funds can be used in any way to support the organization, including paying utilities, payroll, outreach, and rent for the office. Basically, it’s your day-to-day money you’re working with, and it can also be moved to a restricted fund if necessary.
Restricted funds have a specific purpose and are generally designated for that set purpose by a donor or the foundation who awarded your organization a grant. Not only can this money not be moved from one fund to another, it can’t be used for anything besides what it was given for. For example, if you’re doing a fundraiser specifically for a new van for your church, any money collected in that fundraiser can only go to the new van because the people giving are expecting that money to pay for a van and nothing else.
There are two types of restricted funds:
- Permanently restricted funds continue indefinitely but are set aside for a specific use such as a foundation that creates a scholarship at a specific university for a incoming freshman each year. Money in this account is re-filled, but it’s still got to go to this one purpose.
- Temporarily restricted funds are set for one purpose or a set time period, like a one-year fundraiser in which, at the end of the year, any money collected will go to pay for new computers for the school library.
If someone donates to your nonprofit, school, or church, they can specify any restrictions or directives for the funds in a gift letter. However, if there is no directive, the money can be used however the organization wishes in alignment with the operations or mission of the organization. For example, it can either go to paying rent and payroll in the unrestricted fund, or it can be added to the restricted “new roof” fund.
Keeping Track of Funds
While fund accounting does have very set and stringent guidelines for how to keep track of your spending and fund management, it’s important to know that there are no special banking procedures. Many nonprofit organizations have different accounts for each fund. For example, a church may have a general account of unrestricted funds for operations, an account of unrestricted funds they have set aside for community outreach, then restricted funds for a new roof, restricted funds for a youth mission trip, and so forth.
Trying to juggle multiple accounts often leads to more work and costs for your organization. Instead, it’s much less work to keep your funds in one account and just make sure your accounting system is tracking the money that is broken down into separate funds.
The one exception to keeping a fund in a separate account is in the event you have a permanently restricted endowment. Remember the ongoing scholarship fund example? Keeping this fund in an account that collects interest allows you to grow the money in the account or apply any interest collected to your unrestricted fund.
Choosing Fund Accounting Software
While your nonprofit organization’s accounting and bookkeeping may be fairly straightforward right now, it can get complicated very easily. If you receive grants for your nonprofit that go to a specific purpose, take donations for your general unrestricted fund, and are also doing a drive to a separate goal, you’ll soon find that you need your accounting software to go to work for you, or else your reporting and financial statements will be a mess.
Instead of using a basic Excel spreadsheet or trying to shoehorn your nonprofit accounting information into typical business accounting software, designated fund accounting software will make it easier and more efficient to keep track. It includes the ability to record, track, and manage resources from donors, grants, and government agencies in a way that is transparent, efficient, and improves accountability.
When choosing your fund accounting software, look for the following features:
- Grant management
- Comprehensive reporting tools
- Budgeting and forecasting
- Cloud-based mobility
- Customization to allow your organization to scale and integrate other functions and features
Contact Us to Choose the Right Fund Accounting Software
At Capital Business Solutions, we connect nonprofits to the right fund accounting software and integrated software solutions and provide comprehensive training and implementation so you get the most out of it. Learn more about Blackbaud Financial Edge NXT™ and MIP Fund Accounting® and schedule a consultation to get on the path to accounting efficiency!