Nonpt-for-profit organizations play a crucial role in addressing societal issues and serving communities. While their primary goal isn't maximizing profits, managing finances effectively is essential for their sustainability and impact. A significant aspect of not-for-profit financial management is understanding the difference between restricted and unrestricted funds and their impact on cash flow.

What are restricted and unrestricted funds?

Restricted funds are donations or grants designated by the donor for a specific purpose or program. The funds come with restrictions on how they can be used, often outlined by the donor or grantor.

Unrestricted funds are contributions that don't come with specific restrictions. Not-for-profits have more flexibility in using unrestricted funds to cover operational expenses, salaries, or other needs as they see fit.

Impact on cash flow

Restricted funds

Restricted funds impact not-for-profit cash flow in various ways, including:

• Limited flexibility
• Timing issues
• Reporting requirements

Limited flexibility: While restricted funds are earmarked for specific purposes, they can't be freely allocated to cover other expenses. This restriction can create challenges in managing cash flow, especially if the organization relies heavily on restricted donations.

Timing issues: Sometimes, not-for-profits receive restricted funds before projects or programscommence.. Managing cash flow becomes crucial to ensure these funds are available when needed without compromising other ongoing operations.

Reporting requirements: Not-for-profits often have reporting obligations to donors or grantors regarding the use of restricted funds. Meeting these requirements adds another administrative burden but is crucial for maintaining donor trust and compliance.

Unrestricted Funds

Unrestricted funds also provide their own impacts on not-for-profit cash flow, like:

• Operational stability
• Strategic allocation
• Sustainability

Operational stability: Unrestricted funds provide essential support for day-to-day operations, offering flexibility to cover immediate needs such as rent, utilities, and salaries. They act as a financial cushion during lean times or unexpected expenses.

Strategic allocation: Not-for-profits can strategically allocate unrestricted funds to areas where they are most needed, whether investing in new programs, expanding existing ones, or building organizational capacity.

Sustainability: A healthy balance of unrestricted funds contributes to the long-term sustainability of a not-for-profit. It reduces reliance on external funding sources and grants, making the organization more resilient to fluctuations in donor preferences or economic conditions.

Strategies for managing restricted and unrestricted funds

To successfully manage both restricted and unrestricted funds, not-for-profits must implement targeted strategies, including:

• Budgeting and forecasting
• Diversifying revenue streams
• Negotiating flexibility
• Transparent communication

Budgeting and forecasting: Develop detailed budgets and cash flow forecasts, distinguishing between restricted and unrestricted funds. This helps plan for upcoming expenses and ensures adequate liquidity for both types of funds.

Diversifying revenue streams: Reduce dependence on restricted funds by diversifying revenue sources. Explore opportunities for earned income, membership fees, or fundraising events to supplement donations and grants.

Negotiating flexibility: When entering into grant agreements or accepting donations, negotiate for flexibility whenever possible. Seek to minimize overly restrictive conditions that could impede cash flow management or limit the organization's ability to adapt to changing needs.

Transparent communication: Keep donors and stakeholders informed about the organization's financial situation, including how restricted funds are utilized. Transparent communication fosters trust and encourages ongoing support.

How Citrin Cooperman can help your not-for-profit

Citrin Cooperman’s Not-For-Profit Industry Practice can help you make informed financial decisions. Our day-to-day outsourced accounting teams can also help implement the highest quality donor and government accounting standards.

For additional assistance with cash flow management, developing detailed not-for-profit budgets, and audit support, contact us today.