Nonprofit Donations: Common Challenges with Restricted Contributions

Updated February 2024 

When a donor specifies their gift to a nonprofit must be used for a certain purpose, the contribution is considered “restricted,” and the organization is then required to use the contribution for the purpose designated by the donor. To ensure compliance, a process should be established so the nonprofit can accurately track and monitor the restricted contributions received and spent. As you develop this process, here are a few commonly faced challenges to be on the lookout for.

• Challenge #1: An organization doesn’t have a good understanding of what is, or isn’t, a restricted contribution and the importance of accurately using it in the way specified by the donor.
  • Recommended Solution: Nonprofit leaders whose organizations receive contributions must take time to understand the different types of contributions received, the wording on donation solicitations, and the accounting and legal requirements involved in accepting and using the donations. Ultimately, they are responsible for the use of the contributions, as well as the tracking and reporting.

• Challenge #2: The organization doesn’t have a well-established process to track restricted donations received and how they’re being used.
  • Recommended Solution: Many organizations track this manually in an Excel spreadsheet as well as in their accounting applications. If your organization does this, it’s very important to reconcile these two tracking processes regularly to ensure they’re aligned. If not, this can cause the organization’s leadership to have an inaccurate view of the overall financials and what’s available for use in operations. Additionally, the organization may not realize that it’s using restricted funds for operational expenses, which could lead to challenges down the road.

• Challenge #3: The organization accepts a donation without considering the impact of the restriction or the administrative bandwidth involved to track its activity.
  • Recommended Solution: Sometimes organizations’ accounting applications aren’t setup to track how the restricted funds are used, and employees are manually looking up individual costs to calculate the use of restricted funds. This increases the risk of errors and the chance of restricted funds being used incorrectly. The best practice is to set up accounting applications to track restricted funds so a report can easily be created to show balances and activities. It’s important to be able to drill down to the level of an individual donation or expense in case there are ever any questions or changes to reporting requirements.

• Challenge #4: Accepting too many restricted contributions and not enough unrestricted contributions.
  • Recommended Solution: This can make it difficult to pay operational expenses such as salaries and utilities. An organization may have enough restricted funds for a specific project, but they can’t be allocated for other uses or needs. In most cases, the original donor needs to provide explicit approval for their restricted contribution to be used for operations. If an organization’s operating costs regularly exceed its unrestricted revenue, the organization will likely end up using restricted funds for operations. To avoid this, plan and budget strategically for unrestricted revenue flow and monitor how much restricted vs. unrestricted revenue the organization is receiving.

In conversations with donors, nonprofit leadership should emphasize the importance of having a strong foundation to accomplish the organization’s mission. Paying competitive salaries to attract the right staff, having reliable and up-to-date technology, and providing staff with the tools they need to be successful are all necessary to build and maintain a strong nonprofit. Donors may then be more likely to donate unrestricted contributions to the organization to help with these expenses.

Establishing a clear process for tracking and monitoring restricted contributions is extremely important to your nonprofit’s financial success and future growth. The experts at SST are experienced in these areas and can help you create a streamlined tracking process tailored to your organization’s unique needs. Learn more about our nonprofit expertise and services, or contact us today for immediate assistance.