Giving
Restricted funds, and the small organisations that spend them twice
A donation given for one purpose cannot be used for another. The rule is simple and the bookkeeping that enforces it usually is not.
When a donor gives for a stated purpose, the money is restricted to that purpose. Most people running small organisations know this. The failures come from accounting that cannot tell restricted money from general money once it is in the account.
One bank account, two kinds of money
Few small organisations keep separate accounts, and they do not need to. What they need is a ledger that tracks restricted balances separately from the bank balance. Without it, a healthy bank balance can be entirely committed, and the organisation will not know until it tries to pay a bill it cannot cover.
The symptom is familiar: an appeal raises money for a specific project, the project is delayed, and in the meantime the balance is used for payroll on the assumption it will be replaced. It is a cash-flow decision that is also a misapplication of funds, and the people making it usually do not see it as one.
What counts as restricted
A restriction does not require a formal agreement. An appeal that says money will fund a given project creates a restriction on everything given in response, whether or not individual donors said anything. Organisations that word appeals loosely often have more flexibility than they think, and those that word them tightly sometimes have far less.
This is worth deciding before the appeal rather than after. Adding a line that unspent funds may be applied to general work, published at the point of giving, is honest and preserves room to move. Deciding the same thing afterwards is not available.
When the purpose fails
If a restricted purpose becomes impossible, the money does not simply become general. The usual routes are to go back to identifiable donors and ask, or to apply to vary the restriction where the law provides for it. Both take time, which is why discovering the problem during the year-end accounts is worse than discovering it in March.
What to show trustees
A single monthly line: total funds, restricted funds, free reserves. Most boards see only the bank balance, which is the least informative of the three. A board that sees free reserves fall for three consecutive months can act. A board that sees a bank balance cannot, because the balance looks fine right up until it does not.