All About Restricted vs Unrestricted Funding

Click to expand transcript

What’s restricted versus unrestricted funding? And what’s general operating?

Let’s talk about money with strings attached, and money that comes with freedom.

Restricted funding means the donor or funder decides how you can use it. They might say, “We’re giving you this grant, but it has to go towards that program or project or event, and it has to be spent by this date.”

Unrestricted funding means you can use the money where you need it most. Multiple projects, artist stipends, your storage unit, website emergencies, whatever you want!

When you hear general operating support, or GenOps, that’s unrestricted funding for your whole organization. It’s what keeps the lights on, and the team paid.

Project support is restricted. It’s for that one show, or event, and often doesn’t cover admin or infrastructure, unless you budget those in from the start.

Here’s an important distinction. If you set money aside for something specific, that’s not restricted, that’s designated. True restrictions only come from the funder, or donor. So when you apply for project-based funding, make sure you build in real costs. Staff time, access needs, tech, marketing, admin, not just the artistic stuff. And when you get unrestricted funding, that’s gold. It means the funder trusts you to lead, and we love to see it.

What is Restricted Funding? What is Unrestricted Funding?

First thing’s first: these distinctions only matter if you’re receiving a grant. That’s it.

“Restricted” funding means that there’s a specific purpose or time period that you have to spend the grant. Usually, grants for specific projects are restricted funding. If you get a grant that’s for a specific program or purpose, like a specific performance or hiring a new executive director, it’s considered purpose-restricted — you can’t spend it on anything but expenses related to that purpose. If you get a grant award now but the grant period isn’t until next fiscal year, it’s time-restricted — you can’t spend it until that time period begins (or, in some cases, after it ends). The award letter or grant agreement (contract) from the funder might not say clearly whether the grant is considered restricted or not. If you’re not sure, reach out to the program officer at the foundation to ask for clarification.

“Unrestricted” funding means that the money is yours to do with what you will, when you will. Some grants are unrestricted (always double check!). Grants of unrestricted funding may also be called “general operating support”.

All of your earned income, like ticket sales, teaching fees, contracted artist fees, and merch sales is unrestricted. Unless a donor specifies a restriction (like, “I only want you to use my $500 donation for chicken feed”), donations are usually unrestricted.

Take a look at these real grant award letters below and note the highlighted parts — can you tell which is for an unrestricted grant and which is restricted?

Where do funding restrictions come from?

All restrictions come from the funder!

If there’s money that you’re internally deciding to use for a specific purpose, that is great! You don’t have to do any of the weird fund accounting processes in that case. Just keep a list along with your budget so you don’t double-count anything.

I have restricted funding. What do I need to do?

The main things you need to do are:

Keep a list of all the restricted grants you have. Include the total award amount, the funder, the dates of the grant period, and a note to yourself about what the grant is for (the purpose). It’s to your advantage to keep this list in a spreadsheet (e.g., Microsoft Excel, Google Sheets) instead of a word processing document (like Microsoft Word or Google Docs). This list is called your “restricted grants schedule.” Here’s a sample you can download and use.
Track the overall restricted grant amounts in your bookkeeping software, using a net asset account for “temporarily restricted net assets” and a revenue account under Contributed Income for “released from restriction”.*

*This is the most intricate and confusing part of all of nonprofit accounting! It’s a really detailed and rare part of accounting in general (“fund accounting”). We’ll explain the general workflow here, but it will most likely not make any sense the first, second, or third times you read it. Even seasoned professionals get tripped up sometimes.

For the curious: In your bookkeeping software, when you enter the grant information in, it should go in a section of your “net assets” called “Donor-restricted Net Assets” (formerly called “Temporarily Restricted Net Assets”). It is not revenue at that point. You only count it as revenue once the time or purpose restrictions have gone into effect (“released from restriction”) . For example, you’re awarded a $25,000 grant for your end-of-year performance event (purpose restriction). When it’s awarded, book it as a “Temporarily Restricted Net Asset”. When it’s time to spend money for that event, you move the $25k from “temporarily restricted net assets” (balance sheet account) to the “released from restriction” account (revenue account / P&L account). Or, you’re awarded a 2-year grant with $15k each year for a total of $30k. You would record $30k in Temporarily Restricted Net Assets when the grant is awarded, and then release $15k in the first year and $15k in the second year.

Still confused? That’s okay!! Reach out for support if you need to — here’s a list of our vetted finance folks who can give you some extra insight.

Why is this even a thing?

In theory, the purpose of fund accounting is to have a paper trail to make sure your organization is spending money appropriately. In practice, it ends up being more complicated than many small organizations have time for. Unfortunately, following fund accounting rules is a legal requirement for nonprofit organizations in the US. So in the gap between “we have to do this” and “we don’t have time to do this”, some nonprofits can get caught up in internal confusion about what money is available to spend, stressful audits, or legal messes.

As Vu Le of NonProfit AF writes in the classic blog post, “Answers on grant reports if nonprofits were brutally honest with funders,” tracking restricted funds is an administrative headache that only happens “on paper” — there’s no pile of cash in a room with a label marked “ONLY SPEND ON PROJECT X”. Le offers:

“How did you spend the grant that we provided you? The grant you gave us went into our bank account, which is used to pay for everything. Disaggregating what you paid for versus what others paid for is one of those meaningless time-wasting activities you force on us that harm our work. Here’s a detailed financial report of every expense we made this year. Look through it, and if it makes you feel better to think that you paid for books for low-income children and not staff salaries or whatever, please use your own time to craft that delusion.”

It’s not all doom and gloom, though! Once you understand what’s going on, you can manage the bookkeeping part with confidence. Or, better yet, use some unrestricted revenue to hire a bookkeeper to track it for you. 🙂