What are funds, and why are they important to nonprofits?
A fund is money your organization receives that must be used for a specific purpose. For example, money that belongs to a “Building Fund” must be spent on that building.
What makes funds unique to nonprofits is that a fund’s money must be spent on that purpose and none other. If someone donates to your organization with the intention that you spend their donation repairing your vehicles, then it is considered illegal for you to spend it on anything else.
In the eyes of the government, there are two types of funds:
- Unrestricted assets
- Restricted assets
“Unrestricted” funds are donations the nonprofit may use for any purpose. They usually go toward the operating expenses of the organization or to a particular project that the nonprofit picks.
When it comes to restricted funds, there were formerly two types of restricted funds: temporarily restricted funds and permanently restricted funds. However, as of December 15, 2017, the FASB has condensed this category into simply restricted funds. Time-restrictions might still be imposed on a donation by a donor, so below is an explanation of how they work:
Time-restricted means that the donation can be used for a particular purpose for a specified time period. When the time is up, or the project is done, the funds become unrestricted, or may be returned. Permanently restricted funds never expire. This situation can be seen with charities that will invest money and donate the interest and investment returns. Whatever type of restricted fund is set up, the nonprofit must keep track of it and report it appropriately in its financial statements. Consult the Generally Accepted Accounting Principles (GAAP) at the Financial Accounting Standards Board (FASB) for detailed information.
To give you an idea of types of funds you might receive from donors, here are examples:
- Grants
- Departments
- Campaigns
Now, there is a difference between restricted money that donors give you which you’re legally obligated to set into a specific fund, and funds that your nonprofit might create in order to responsibly allocate money throughout the organization. You might have a large quantity of unrestricted funds that you would like to separate into different funds, for the sake of proper budgeting. This is okay.
When trying to think of what a fund might be for your organization, ask yourself, “Do I need to know how much money I have to set aside for _____?” Some programs and software will mask funds as classes or categories, but beware… these methods will allow you to track how much money you’ve received and spent for a class, but it’s very difficult to find out how much money you have set aside for it at any given time.
