With the constant economic uncertainty of the American economy post-pandemic, nonprofits must adopt a creative and agile approach to managing funds. In times of economic distress, this approach may involve utilizing restricted funds.  

In this blog, TASC will explain restricted funds, outline a hypothetical scenario that would warrant an organizational leader to approach a donor about lifting the restrictions and share a list of best practices for navigating such a situation should one arise.

What Are Restricted Funds?  

The Corporate Finance Institute defines restricted funds as “a reserve of money that can only be used for specific projects or purposes.” Consequently, restricted donations are ones where donors give money to fund specific projects. In moments of economic uncertainty, many nonprofits may be inclined to approach foundations, individuals or corporations who delivered restricted donations and ask them to release their constraints and allow such funds to go towards more critical areas lacking cash flow.  

A Scenario to Consider 

Consider this example. Say a donor delivers a large tranche of money to your charitable organization but does so with the agreement that the funds must go toward one specific program within your organization. In normal economic conditions, you have a responsibility to ensure these funds are used for the restricted purpose they’re assigned. 

However, if you’re in the middle of a recession or a once-in-a-lifetime global pandemic, you may lack the baseline funds to run the core tenets of your organization. If the organization fails, the donor’s program will fail with it. In that moment, a nonprofit leader has a responsibility to ensure the long-term viability of their organization, and this may require your team to approach a donor about lifting or loosening the rules on their restricted donation.  

Approaching Your Donors 

Restricted donations aren’t necessarily ironclad, and if nonprofits approach donors with a tactical plan regarding their contribution, donors may be willing to assist, lift restraints and ensure the long-term success of the burdened charity.  

If your nonprofit is facing such a situation, here are some steps to take when speaking with donors:  

1. Take a sincere approach to understanding the intent of the donation  
2. Have a clear budget of what amount can be used in other areas and why this need is so great  
3. Show the foundation or donor what adjustments you have already made to help support your organization  
4. Exhibit to the donor that their initial cause will not go by the wayside by providing a clear plan for the future use of the funds with their original intent  

If the donor is unwilling to make changes to the restricted funds, and you think perhaps you aren’t getting the most use out of the funds provided to your charity, nonprofits can also request support in managing the fund.   

Finally, whatever you do, do not use restricted funds for purposes not designated by the donor. Such actions can lead to serious legal problems and poison any relationship between a benevolent donor and an in-need institution. 

Economic uncertainty is a constant factor in any nonprofit’s strategic financial plan, and should tough economic times impact a nonprofit, organizational leaders should consider approaching donors about lifting restricted funds. For over twenty years, The TASC Group has provided public relations and strategic communications consulting to some of the nation’s highest-profile nonprofit organizations. TASC works directly with nonprofit leaders and their organizations and external relations, PR crisis management and strategic communication to engage donors and stakeholders.