September 11, 2024 •HoganTaylor
Brad, the development director at an international environmental charity, was thrilled when a staff member shared exciting news: a former donor was planning a six-figure donation. But there was a catch. The donor wanted to attach specific restrictions to how the funds could be used. For example, she didn’t want her money supporting operations in certain countries where the charity was active.
While Brad was eager for the generous contribution, he understood that restricted gifts come with unique challenges. If your nonprofit receives donations with strings attached, it’s crucial to handle them with care to avoid pitfalls.
Establish Clear Procedures
Donors who place restrictions on their gifts pay close attention to whether nonprofits follow through on their commitments. In fact, nonprofits have faced lawsuits from donors who believed their contributions were misused. Even if litigation isn’t pursued, the misuse—whether intentional or not—can lead to damaging publicity.
This is why clear procedures for handling restricted donations are essential. Accountability and transparency are key to maintaining trust with your supporters. While there's no universal solution for tracking restricted gifts, the cornerstone is a well-defined, consistently applied system.
First, train staff to identify and flag restricted donations upon receipt. Ensure that the paperwork outlining the restrictions is delivered to the appropriate personnel who will oversee compliance. These team members should document the conditions and how your organization will meet them.
Ensure Proper Tracking
Tracking restricted contributions goes beyond documentation—it also involves careful financial management. Every expenditure tied to a restricted donation should be recorded. Whether you use a simple spreadsheet or allocate restricted donations as separate funds in your nonprofit’s general ledger, accuracy is vital.
To prevent mistakes, establish a regular review process to verify that funds are being used as intended. If an error is discovered, address it immediately to avoid further complications. Consider setting up a reminder system to track any donor-imposed reporting requirements, ensuring you meet all obligations.
Additionally, track the impact of restricted gifts. Being able to showcase how a donation made a tangible difference can strengthen relationships with donors and pave the way for future contributions, not just from them but also from others who value measurable outcomes.
Know When to Decline or Negotiate
Sometimes, complying with donor restrictions can be burdensome—or even impossible. For example, imagine a healthcare nonprofit is offered a valuable piece of art, with the condition that it cannot be sold. In such a case, it may be in the organization’s best interest to decline the gift. But before doing so, invite the donor for a candid discussion. Express your gratitude for their generosity, explain why the restrictions are challenging, and explore alternative ways for them to support your cause.
Promote Unrestricted Gifts
To maximize flexibility, encourage donors to make unrestricted gifts. Nonprofits often thrive when they have the freedom to allocate resources where they’re most needed. By building trust and communicating the benefits clearly, you can help donors understand that unrestricted gifts allow your organization to be more agile and responsive.
Final Thoughts
Restricted gifts can be an asset for nonprofits, but they require thoughtful management. With clear procedures, careful tracking, and open communication with donors, your organization can honor these contributions while maintaining operational flexibility. Need more guidance on navigating restricted donations or encouraging unrestricted ones? Contact us for expert advice.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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