For nonprofit leaders, CFOs, and finance committees, balancing liquidity with donor intent can be a constant challenge. Restricted funds and endowments often represent some of an organization’s most important and most sensitive assets.
Responsibly managing restricted funds and endowments secures donor trust and helps you avoid regulatory scrutiny. Errors in tracking, commingling, or investing these dollars inappropriately, on the other hand, can trigger compliance issues under ASC 958 or the Uniform Prudent Management of Institutional Funds Act (UPMIFA), as well as reputational damage that can take years to repair.
Proper stewardship requires clear policies, rigorous tracking, and financial infrastructure designed for restricted fund management. Below, you’ll find some of the essential dos and don’ts of managing restricted funds and endowments effectively.
Do: Create Clear Policies
To accept and manage restricted funds and endowments, you must have a set of policies and workflows that ensure organization and consistency.
Adhere to a Gift Acceptance Policy
Before depositing a single dollar, every nonprofit should have a formal gift acceptance policy. This policy defines which types of restrictions your organization is willing and able to manage.
Accepting gifts with overly complex or burdensome restrictions can create long-term administrative strain. For example, accepting a complex endowment for a program you don't intend to run can cost more in administrative time than the gift is worth.
Document Restrictions in Writing
Every restricted gift should be accompanied by clear documentation that specifies:
- Whether the gift is temporarily or permanently restricted
- The specific purpose or program the funds must support
- Any timing requirements, such as spend-down periods
- Donor reporting expectations or performance metrics
This documentation becomes your first line of defense during audits, board reviews, or donor inquiries.
Align Your Investment Policy Statement (IPS)
Your Investment Policy Statement (IPS) should explicitly address how different types of restricted funds are managed.
Temporarily restricted funds are often managed with greater emphasis on liquidity, while permanent endowments are commonly structured with longer time horizons in mind. While actual investment decisions should always be guided by each organization’s policies and professional advice, the point is that assigning the same asset allocation across all funds ignores these realities and can increase risk.
Staff across your organization should understand these policies to ensure nothing slips through the cracks and endangers your compliance. This is also where partnering with an investment advisor specializing in nonprofits can help.
Don’t: Commingle Restricted and Unrestricted Funds
Spending restricted funds early, or using them for purposes outside the donor's intent, violates nonprofit accounting standards under ASC 958 and, in many states, UPMIFA.
Even accidental commingling can undermine donor confidence and create audit findings that follow your organization for years. Crowded suggests using a unified banking platform to maintain control over your restricted funds. These tools allow you to:
- Segregate funds using dedicated subaccounts for restricted and unrestricted dollars
- Control spending by limiting which categories or merchants can access specific funds
- Monitor compliance in real time to ensure every transaction aligns with donor intent or grant requirements
By structurally separating funds at the banking level, not just in spreadsheets, you can often reduce risk and increase transparency.
Do: Track and Separate Restricted Funds Using Technology
Your accounting system must be capable of tracking restricted funds independently from operating dollars. A well-designed chart of accounts should clearly distinguish:
- Restricted vs. unrestricted revenue
- Expenses charged to specific restricted funds
- Remaining fund balances at any point in time
This clarity is essential for financial reporting, audits, and board oversight. To simplify the process, many charity donation processing systems flag and code restricted gifts the moment they are received. This prevents restricted dollars from ever entering the general operating pool.
This is especially critical for managing multi-chapter organizations, where both national offices and local chapters may manage restricted funds simultaneously.
By clearly segregating these dollars, you ensure that money earmarked for a scholarship, capital project, or program expansion is never accidentally used to cover routine operating expenses.
Don’t: Apply a One-Size-Fits-All Investment Strategy
Your investment management and execution should reflect the unique time horizons and liquidity needs of each fund, as well as the nature of your organization
Treating a short-term restricted grant like a perpetual endowment is a recipe for financial stress. A building fund needed in six months likely requires liquidity and capital preservation, while a permanent endowment may be able to tolerate market volatility in pursuit of long-term growth.
Investment decisions should also reflect your organization’s structure and regulatory environment.
For example:
- 501(c)(3) public charities often focus on long-term endowment growth to support charitable programs
- 501(c)(6) associations may maintain reserves for advocacy, lobbying, or industry defense cycles, requiring different liquidity and risk profiles
Ensuring your investment strategy aligns with both fund purpose and entity type is critical for compliance and sustainability.
Do: Communicate Impact, Not Just Fund Balances
Effective restricted fund management doesn’t end at reconciliation. Major donors want to understand the true impact of their gifts.
Instead of sending donors a report that shows only market value and yield, pair financial data with a success narrative showing what their gift enables you to achieve.
For example:
“Thanks to your generosity, we were able to provide fifty students with tutoring services for an entire year that will boost literacy rates in our local community.”
Connecting the financial management to the mission outcome is the ultimate goal of stewardship.
Strong Stewardship Is Key to Lasting Donor Relationships
Managing restricted funds and endowments is a delicate balance between strict compliance and strategic growth.
By modernizing how you manage restricted funds, you protect donor trust, strengthen governance, and support your organization's growth.
