Brad, the development director of an international environmental charity, was thrilled to learn from a fundraising staffer that one of the charity’s past supporters was promising to make a new, six-figure donation. But there was a catch: The donor was going to attach restrictions to her gift. She didn’t, for example, want her money used in various countries where the charity had operations.

Although Brad was excited about the donation, he was also wary because he knew that restricted gifts require careful handling. Your not-for-profit organization also needs to be careful with donations that come with strings attached.

Apply well-defined procedures

Restricted gift donors pay close attention to whether nonprofits strictly adhere to the small print included with their contributions. Donors have sued nonprofits they believe used their restricted gifts for other purposes. Even if donors don’t pursue litigation, the misuse of funds — fraudulent or not — can generate negative publicity for charities.

For these reasons, 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, you should train employees to properly identify and label incoming restricted contributions and deliver the paperwork to the appropriate staffers. Those designated staffers then should document the restrictions and how they’ll be fulfilled.

Demonstrate responsibility

Your nonprofit should also record all expenditures allocated to a restricted contribution. Use a simple spreadsheet or track restricted contributions as individual funds in your organization’s 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 — as well as others concerned about the outcomes of their gift-giving.

Encourage unrestricted contributions

Your nonprofit may find complying with restrictions difficult — and in some circumstances, impossible. For example, if a donor offers your healthcare nonprofit a work of art and stipulates that you can’t sell it, you might be better off refusing the donation. But first, invite the donor for a one-on-one discussion where you express gratitude for the offer, explain your reasoning for declining it, and explore other ways for the donor to support your cause.

Finally, to provide the greatest amount of flexibility, encourage donors to make unrestricted gifts. Donors are more likely to agree if your message is communicated well and they trust you. Contact us for more information on handling restricted gifts and encouraging unrestricted ones.

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