Why Tracking Restricted & Unrestricted Funds Matters for Nonprofits
- BryMar Crew
- Oct 8
- 3 min read
Building Trust Through Transparency
Trust is the foundation of every successful nonprofit. Yet, a recent survey by Give.org found that only 22% of respondents actually trust nonprofits. This gap opens the door to new opportunities, because when donors and boards see strong financial management, they see integrity and transparency.
The foundation of building that trust starts with accurately tracking your restricted and unrestricted funds, which is exactly what we’ll cover in this article.
Restricted vs. Unrestricted Funds: Knowing the Difference
Every dollar that enters your organization has a purpose, but not all dollars are created equal.
Donor-restricted funds are donations designated for a specific use. Donors may require that their gift support a particular program, scholarship, or initiative — and nonprofits are legally bound to honor those wishes. Donor-restricted funds come in two forms:
Permanently Restricted Funds – Often part of endowments, these funds preserve the principal while allowing the investment income to be used for operations or specific programs.
Temporarily Restricted Funds – These are time-bound or project-specific funds that convert to unrestricted once the restriction expires. For example, a donor might give $150,000 to build a new community center. Any leftover funds after the project is complete may be moved to unrestricted funds.
Unrestricted funds, on the other hand, are the flexible fuel that keeps your mission running, covering the essentials, like salaries, rent, technology, and general operations. Common sources include annual donations, matching gifts, and investment income.
Why Accurate Fund Tracking Builds Transparency
Fund tracking isn’t just an accounting requirement — it’s a cornerstone of credibility. Beyond IRS compliance (yes, the IRS requires donor-restricted funds to be properly reported), accurate tracking helps your organization:
Protect donor confidence – Transparency in how you allocate funds strengthens relationships with current and future supporters.
Empower your board – Detailed fund reporting gives your board the clarity it needs to make sound financial decisions.
Simplify your audit – When your fund tracking is organized and up to date, your audit process becomes more efficient and less stressful.
Comply with GAAP – Most nonprofits need an independent double check of their books, known as an audit. One of the requirements of GAAP is proper fund tracking.
Proper tracking ensures you’re not just compliant — you’re credible, accountable, and compliant.
5 Ways to Strengthen Your Fund Tracking Process
Every organization’s system looks a little different, but these five best practices can make a big difference:
Invest in nonprofit accounting software – Choose a system, like QuickBooks Online, that allows you to tag, track, and report donor-restricted and unrestricted funds separately. Changing your tracking can be done through the settings in QBO.
Separate fund categories on financial statements – Provide clear visibility to your board and donors by distinguishing fund balances on your financials.
Budget from restricted revenue first – Start your budget planning with donor-restricted funds to ensure obligations are met before using flexible dollars.
Audit regularly – Conduct internal fund reviews monthly or quarterly to catch discrepancies before year-end.
Partner with a nonprofit accounting expert – Fund accounting is nuanced. Having the right partner ensures compliance and peace of mind.
Strengthen Trust. Simplify Audits. Maximize Impact.
Your donors, board, and community depend on your integrity — and that starts with financial clarity.
If your team struggles to confidently manage restricted and unrestricted funds, or if you want to ensure your fund tracking processes are airtight before your next audit, BryMar CPA can help.
We specialize in nonprofit audits and fund accounting for organizations over $2M, helping executive directors build trust, streamline reporting, and focus on what matters most — advancing your mission.
Contact BryMar CPA today to schedule a consultation and see how we can help your organization strengthen trust through transparency.
