How to Utilize Donor-Restricted and Unrestricted Funds Effectively
Understanding your nonprofit’s net assets equates to understanding your organization’s ability to survive and thrive. Net assets are the value of what the organization owns (assets) minus what it owes others (liabilities). It’s simply the amount of money left over if your nonprofit sold all its assets and paid off all its debts.
A common misconception is that net assets equal the amount of money the organization has available to spend. Unfortunately, it’s not that simple when it comes to nonprofit accounting. That’s because nonprofits must classify their net assets as donor restricted or unrestricted on their financial statements. Those with restricted assets will have a different bottom line on their statement of financial position (aka, balance sheet.) Let’s break it down so you know how much money your nonprofit truly has to spend.
Unrestricted Net Assets
Unrestricted net assets are those without donor restrictions. These are assets given to the nonprofit organization without any limits. It’s any cash or assets donated to a nonprofit organization without restrictions on how and when it’s used. The nonprofit can use the assets in any way it wants for fulfilling its mission.
Restricted Net Assets
Restricted net assets are those with donor-imposed restrictions. The restrictions dictate how the organization should spend the donations. The money could be limited to specific programs or projects, a time period for utilization, or other particular conditions. For example, say you receive a pledge to be paid over ten years. The portion to be paid in future years is considered time restricted since it’s only available to be spent later. Therefore, any funds to be received or spent in future years are considered restricted net assets.
Note that restricted net assets could also be permanently restricted. These are usually in the form of endowment funds which generate income to help sustain a nonprofit. Permanent endowment funds provide income in perpetuity, and term endowment funds provide income for a specified period. All endowment funds are considered restricted net assets.
How to determine net assets for your nonprofit
Net assets are rarely broken down correctly on balance sheets, so you’ll have to dig deeper to discover the true nature of any donor-restricted assets. One way to do that is by looking at your latest audited financial statements. Restricted cash typically appears on a company’s balance sheet as either “other restricted cash” or “other assets.” Also, look closely at the notes toward the back. You should find detailed information on donor-restricted net assets, including the amounts and nature of each.
To determine your net assets, subtract your liabilities from your total assets to come up with your total net assets. Then, subtract all net assets with restrictions. Any positive number remaining is your net assets without donor restrictions. That’s how much money your nonprofit truly has to spend.
Restricted assets – not so restricted?
Special considerations exist in which restricted assets could become unrestricted. There are times when restricted cash is not spent as intended, therefore becoming unrestricted cash. The organization can then transfer that money to a general cash account for general business purposes. Or, an organization might hold restricted cash to make a significant capital expenditure, such as a facility acquisition, but later decide against making the expenditure. The money designated as restricted for that purpose could then be freed up for the company to spend or invest elsewhere.
Accurate accounting is vital
Once a contribution is identified as restricted, the accounting and recordkeeping requirements are of paramount importance. Why? Because understanding your net assets is vital to determining a nonprofit’s financial strength. Knowing the complete picture of your net assets with and without donor restrictions provides you and your key stakeholders with a clear understanding of the money your organization has to spend. But, accurately determining your net assets can be tricky. If you need a hand, our expert team of nonprofit accountants can help. We demystify challenges like this for thousands of nonprofits every day and would be happy to help yours too. So, don’t wait – schedule a free call today
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