Add “Un” to Restricted: Freeing Up Funds to Pay Operating Expenses

As many nonprofits without sufficient unrestricted funds have learned, it’s possible to be flush with funds yet unable to pay the bills. If most of your organization’s funds are restricted — earmarked for your endowment or a specific program — coming up with the cash to pay salaries, utility bills and other operational expenses can be challenging.

Selling prospective donors on unrestricted contributions isn’t always easy. A few profligate — and well-publicized — nonprofits, not to mention campaigns against administrative “waste” by nonprofit watchdog groups, have made donors sensitive to the issue. They like to know where their money is going and how it makes a difference. So if you want to grow your unrestricted funds pool, you’ll need to devote special attention to persuading donors, which includes educating them about all the good that unrestricted gifts can do.

Why unrestricted, why now?

In a nutshell, unrestricted funds are stipulation-free, meaning their donors didn’t contribute them to support a particular program, project or purpose. Board-designated funds are also considered unrestricted. Although the board has temporarily dedicated them to a specific purpose (for example, to maintain a certain level of operating reserves), they don’t carry donor stipulations. When an organization is in a cash crunch, its board can undesignate such funds so that they may be used to pay administrative and other day-to-day expenses.

However, regularly relying on operating reserves and other formerly board-designated funds to pay monthly bills isn’t a smart policy. You need a healthy pool of unrestricted funds from which to draw.

In recent years, donors — particularly foundations and government entities — have resisted releasing unrestricted funds. That’s starting to change. In 2014, the White House Office of Management and Budget issued guidance stating that at least 10% of federal dollars awarded to nonprofit grantees should pay for indirect costs. And a coalition of the largest charity watchdog groups recently urged prospective donors to pay less attention to the percentage that nonprofits pay in administrative costs and more on such qualities as how nonprofits are governed and the effectiveness of their programs.

Finding the funds

Nevertheless, obstacles remain for nonprofit fundraisers and boards. One solution is to provide checkboxes on all donation and grant application forms giving donors the opportunity to restrict or not restrict their gift. You can steer them toward the unrestricted box with language such as “use my donation where it’s most needed.” Donors are more likely to choose this option if they think your organization is fiscally responsible. So be sure to use your Form 990 and other publicly released information to provide transparency about financial decisions and to communicate how donations contribute to positive results.

When meeting with individuals contemplating making a major gift, go into details about your nonprofit’s budget and how much it costs to run an effective organization. Donors who understand how your operations run and the challenges you routinely face will be more willing to give unrestrictedly.

Converting for use

What if you have a large amount of already-committed restricted funds you’d like to convert to unrestricted use? Consider what medical relief charity Doctors Without Borders did in the wake of 2004’s Indian Ocean tsunami: It contacted donors and asked permission to redeploy their gifts. While not every donor will agree, with a strong enough argument you’re likely to convince most of them.

Gifts earmarked for obsolete or never-completed projects may also be fair game. Individual state law varies, but in general, if restricted funds can’t be used for their original purpose, nonprofits can modify or terminate the restriction. If you can’t obtain a release from the original donor, you may need to seek judicial permission and meet other requirements.

Finally, the American Institute of CPAs’ Not-for-Profit Entities — Audit & Accounting Guide states that organizations can adopt a policy to allocate a percentage of donor-restricted contributions to administrative costs. Talk to your financial advisor about whether this is an option.

Communicate your need

Although it may mean making some changes to your fundraising strategy, committing to raising more unrestricted funds is energy well spent. As with most endeavors, the key is good communication — explaining why you need the funds and how you’ll use them responsibly.

 Sidebar: Personal appeals are the most powerful

One of the most powerful fundraising tools is a personal appeal from a friend, family member or colleague. If you’re a nonprofit executive or board member, you can leverage your address book most effectively by:

Telling your story. Say, for example, you serve on a board that raises awareness about heart disease. If you’ve lost a family member to a heart attack, you might share your personal experiences to illustrate why you support the organization’s work.

Emphasizing benefits. Philanthropy typically involves both doing good and doing well. If you’re trying to encourage a business owner’s attendance at a benefit dinner, promote its networking opportunities — and public recognition if, for example, the event will be covered by local press.

Appealing in person. E-mail saves time, but face-to-face appeals are almost always more compelling. This is especially true if you offer prospective donors something in exchange for their attention, such as lunch or cocktails and canapés.