Restricted funds: money you hold but cannot freely spend

Restricted funds are donations or grants given for a stated purpose, and the restriction is legally binding rather than a preference. A charity can hold a comfortable-looking bank balance and still be unable to pay next month's salaries, because most of that balance belongs to purposes it was given for. Treating the total as available is one of the few mistakes in this field that is both common and genuinely serious.

What makes a fund restricted

• A donor or funder stating a purpose when giving — in an application, an appeal response, or a letter.
• Money raised through an appeal for something specific, where everybody who gave did so for that purpose.
• Grants for a defined project, which is the largest category for most organisations.
• Not a donor's general preference expressed casually, which is usually unrestricted with a suggestion attached.
• Not money the board has earmarked itself — that is designated rather than restricted, and the board can undesignate it.

Tracking restricted funds separately

1. Keep a fund column against every transaction rather than separate bank accounts, which are unnecessary and awkward in practice.
2. Record the restriction itself — the wording, the source and the date — not just the amount.
3. Allocate a fair share of overheads to each restricted fund where the funder permits it, since projects do consume them.
4. Reconcile fund balances monthly, because an overspent restricted fund is effectively being subsidised by unrestricted money.
5. Report the balance per fund rather than only in total, which is what trustees need to make any decision.
6. Flag funds with a spending deadline, where unspent money must be returned.

The useful figure is free reserves, not the bank balance. Free reserves are unrestricted funds not already committed, and that is the number that answers whether the organisation can survive a quiet quarter. A board shown only the total balance cannot see the risk it is carrying.

When a restricted fund overspends

It has to be met from unrestricted funds, which means a project overrun is paid for by whatever the organisation holds freely — and that is usually the money keeping the lights on. This is why restricted overspend matters more than its size suggests. The fix is monthly reconciliation rather than annual discovery: a project running ten per cent over at month four can be discussed with the funder, while the same overspend found at year end is a hole in the general fund and a conversation with the auditor.

Talking to funders about it

Restrictions can sometimes be varied, but only by asking. Funders may agree to extend a deadline, reallocate between budget lines, or permit a contribution to overheads — none of which they will offer unprompted. The pattern worth internalising is the same as with underspend: almost everything is negotiable while the project runs and almost nothing is once it has closed.

Ettex Sheets handles the fund column and the per-fund balances, which is all most small charities need before an accountant prepares statutory accounts. The restriction wording itself belongs with the grant record, since the question later is not how much was restricted but what exactly the funder said.