Most not-for-profits encourage donors to make unrestricted contributions that will give the organization flexibility to use the money where it’s needed most. But there will always be some donors who place restrictions on their gifts — and these require a higher level of responsibility.

If your nonprofit fails to use a restricted donation as intended, it’s possible the donor will request its return, potentially resorting to legal means. Even worse, other donors may hear about the situation and decide your organization doesn’t deserve their support. So you need to handle restricted gifts with kid gloves.

Accountability is key

Proper tracking of restricted donations is a vital part of the accountability and transparency your supporters expect. 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.

However, in general, nonprofits should train employees to properly identify and label incoming restricted contributions. They need to understand how to deliver paperwork to the appropriate staffers to document the restriction and how it will be fulfilled.

Tracking expenditures and outcomes

Your nonprofit should 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. To minimize the risk of errors, implement a process for regular review to confirm the proper use of restricted funds and — in the event of inadvertent misuse — prompt remediation. Additionally, put in place a “tickler” system to remind you of any donor-imposed reporting requirements.

Finally, 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 concerned about the outcomes of their gift-giving.

When it makes sense to refuse an offer

If a donor wishes to make a gift with particularly onerous restrictions — such as retaining control of an asset or preventing you from selling it — you might consider refusing it. Simply put: Some gifts are more trouble than they’re worth. Contact us for help weighing the potential risks of a restricted gift and for tips on tracking those you do accept.

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