Keep a close eye on restricted contributions

Nonprofits are expected to act as good stewards of all contributions. But restricted contributions, as the name implies, impose a higher level of responsibility. Dropping the ball when it comes to ensuring that such contributions are used as intended can lead to adverse consequences, making detailed and accurate tracking essential.

Why you track

Donors increasingly pay close attention to whether nonprofits strictly adhere to the restrictions on their contributions. Proper tracking of these donations is a vital part of the accountability and transparency that they and other stakeholders prize.

Moreover, donors have been known to sue nonprofits if they believe their restricted contributions have been used for other purposes. Even if they don’t pursue litigation, the misuse of funds — fraudulently or not — can generate negative publicity, a drop in donations and potential criminal charges for misappropriation.

How to track

There’s no one-size-fits-all approach for tracking restricted contributions. You need to develop and consistently apply well-defined procedures that suit your circumstances.

Generally, you need to train employees to properly identify and label incoming restricted contributions. They should know to pass along the paperwork to the appropriate coworkers to document the restriction and how it will be fulfilled.

Also record all expenditures allocated to a restricted contribution. Do this in a simple spreadsheet or track restricted contributions as individual funds in the general ledger. Also implement a process for regular review to confirm the proper use of restricted funds and, in the event of inadvertent misuse, prompt remediation. Additionally, you’ll need a “tickler” system to remind you of any donor-imposed reporting requirements.

Follow the outcomes

In addition to keeping close track of how and when restricted contributions are applied, it’s crucial to track the outcomes of such spending. The ability to demonstrate everything that a contribution accomplished can prove powerful in soliciting more contributions from the original donor and others.