A nonprofit’s guide to managing restricted funds

Managing restricted funds isn’t just an accounting chore—it’s essential to delivering on your mission while staying compliant. Whether you’re a YMCA, JCC, or community rec center, knowing how to track and report restricted funds properly can mean the difference between thriving and scrambling during audits.

In this guide, we’ll walk you through the basics of restricted funds, common challenges, and how nonprofit accounting software helps your team stay organized, compliant, and transparent.

Restricted funds are donations or grants designated for a specific purpose, program, or timeframe. These funds come with strings attached—meaning you can’t use them for general operating expenses or unrelated initiatives.

Types of Restricted Funds

• Temporarily Restricted: Funds earmarked for a specific time period or event (e.g., a summer youth camp).
  
• Permanently Restricted: Endowments where only the income generated (not the principal) can be used, often for scholarships or capital improvements.
  

Failing to manage restricted funds correctly can have serious consequences—from donor mistrust to compliance issues. Here’s why getting it right matters:

1. Donor Confidence

Transparent reporting reassures donors their contributions are being used as promised, increasing the chance of future gifts.

2. Grant Compliance

Grantors often require strict reporting. Mismanagement could lead to losing current or future funding.

3. Financial Clarity

Clear fund tracking helps your team plan more effectively and ensure resources are allocated where they’re most needed.

Even well-run nonprofits hit roadblocks. Here are the most frequent:

Tracking Fund Usage

Manual systems make it easy to mix up restricted and unrestricted funds, leading to inaccurate records.

Compliance and Reporting

Without automation, preparing detailed grant reports or audit documentation becomes a time-consuming hassle.

Resource Constraints

Smaller teams often juggle multiple responsibilities, making it tough to give restricted fund management the attention it needs.

The right nonprofit accounting software can automate, streamline, and strengthen how you manage restricted funds.

1. Automated Fund Tracking

Track each restricted dollar from receipt to expenditure. Set parameters to ensure money is used only for approved purposes.

2. Custom Reporting for Grants

Generate reports by fund, program, or time period—no spreadsheets required. This helps you stay audit-ready and meet grantor expectations.

3. Real-Time Visibility

Dashboards provide a live look at restricted vs. unrestricted fund balances, so you can make quick, informed decisions.

4. Built-in Compliance Tools

Audit trails, approval workflows, and document storage reduce risk and make compliance second nature.

To get the most out of your accounting system—and avoid major headaches—follow these nonprofit finance tips:

Set Up Funds Correctly From the Start

Create unique identifiers for each restricted fund in your accounting system.

Document Every Restriction

Attach grant agreements or donor instructions to the fund record so everyone knows how the money can be used.

Monitor Monthly

Review fund usage regularly, not just at the end of the fiscal year. This prevents overspending or underutilization.

Communicate Internally

Make sure program directors and department heads understand what restricted funds are available and their purpose.

At Daxko, we understand that managing restricted funds isn’t just about accounting—it’s about protecting your mission. Our nonprofit accounting software is built to support the unique needs of YMCAs, JCCs, and community centers, helping you stay accountable, transparent, and efficient.

Ready to Take Control of Your Fund Accounting?

Request a Demo to see how Daxko’s nonprofit accounting tools can help you simplify restricted fund management, increase donor confidence, and stay grant-ready.