Most charities tend to agree that their work would be easier if funders would let them spend money as they see fit. Yet the reality for most non-profits is that a substantial amount of their income comes in the form of restricted funding. In other words, it is earmarked for spending only on specific projects or outcomes – and funders expect accountability.
Why should charities receive restricted funding?
Non-profits are already obliged to ensure everything they do conforms to their charitable objectives. Do they really need any more restrictions?
In a survey by the Institute for Voluntary Action Research (IVAR) for its report Get the Basics Right in 2022, 88% of charities agreed or strongly agreed with the statement: “Giving us unrestricted funding – money that we can spend on anything within our charitable objects – would make a huge difference to our ability to respond to changing circumstances and the things that matter most to our community/cause.”
IVAR says the origins of restricted grants can be traced to the late Victorian era, when a new kind of philanthropist wanted a greater say in how their money was spent, rather than deferring to the knowledge of the charities they supported. Reviewing the available evidence in 2023, IVAR concluded: “Restricted funding has not earned its place as the dominant funding model.” It added: “The available evidence on the benefits of unrestricted funding is becoming compelling.”
Despite that, restricted funding looks like it’s here to stay and could even be growing again. The 2023 Third Sector Trends report People Places and Policy found the number of charities receiving unrestricted funds rose during Covid – from 46% in 2019 to 60% in 2022. Yet the authors detected that the figure might be set to fall.
“During the pandemic, many grantmakers were thinking hard about future strategy, suggesting that unrestricted funding may become less common again when objectives are closely aligned with specified social goals. In such circumstances, grantmakers tend to be more stringent when stipulating the purpose of funding and inviting applications from third-sector organisations,” they wrote.
The report noted: “Without some checks and balances, trust can be abused.” It observed that more charities held reserves after the pandemic than before (76% in 2019, 83% in 2022) but added that its own study of 50 organisations over 15 years suggested very few “gamed” grantmakers inflate their coffers.
How software can help manage restricted funds
Cloud accounting software has helped a number of charities monitor and report on the use of restricted funds. At the outset, we often see finance departments bogged down in the processes necessary to track their projects and stay accountable to funders. The task is to move them to cloud software, which automates some of the most cumbersome jobs in the finance function and enables easy and flexible reporting.
There are several key ways in which software can make handling restricted funds easier.
1. Saving time on manual work
The time spent satisfying the demands of funders is a serious drain on the resources of many charities. IVAR found 71% of respondents agreed with the statement: “I don’t think many grantmakers understand how much time and energy it takes to respond to all their different monitoring requirements.” Its research also noted a lack of flexibility on the part of funders about reporting and deadlines, with one charity commenting: “At points in the year, more of our team’s capacity is spent on reporting than fundraising.”
In some cases, funders can want updates as frequently as every month, and there can be a risk that the funding will dry up if you can’t report as funders require. Cloud finance software which offers specialist fund reporting facilities can vastly reduce the amount of time needed to track this information. The data can be at the user’s fingertips without laborious rekeying of figures or manipulating information in spreadsheets.
2. Giving funders complete data
The more complete the data you can provide to funders, the better. Showing how a budget was spent is one thing, but reporting on how the initiative performed against forecast and what controls were in place is even better. If some aspects did not go as planned, it’s wise to report that too, rather than leave funders to spot it.
Some cloud software can use specialist features to track all this information easily, without requiring the finance team to manually hunt for information or export data from the finance system to wrangle in spreadsheets.
3. Enabling reporting for different audiences
The spreadsheet you’ve worked on for your own managers or trustees may not provide the right information in the right format for funders. You’re going to need to adapt the data for different audiences.
Cloud finance systems really come into their own here. You decide what reports need to be produced and the software then generates them on demand. Not only does this eliminate a lot of work but it ensures the information is always current and accurate, without the need to wait for a lengthy month-end close.
4. Tracking the impact of the funding
While funders won’t want you to skimp on the figures, a lot of the data they may need to see is non-financial. This raises the question of how you can log non-financial data in a finance system. With the right software, you can embed links to documents that measure the charity on its key performance indicators and quantify what is being achieved with the funder’s money.
5. Factoring in contributions to overheads
Some charities are under the misapprehension that grant awards cannot be spent on running costs. But the budget for a particular project or initiative should include a reasonable contribution towards overheads. In fact, failing to factor that in will only lead to running down your already squeezed unrestricted funds. With the right software, it’s much easier to break down those overheads and account for a fair share of them in each project budget.
Benefits for the whole charity
Whether or not it’s the best way to fund charities, restricted funding is not going away any time soon. In fact, IVAR’s research suggests nearly half of charities choose to apply for restricted funding even when they have the option of applying for grants to cover core costs, because they think they will stand a better chance of success.
To track restricted funds as well as they need to, charities will need to look at their finance systems and see whether a move to the cloud could be a wise investment. In the end, reporting accurately on your spending, keeping a watchful eye on costs and measuring the impact of what you do is not just about ticking boxes for funders. It’s also immensely valuable to the charity.
Doing this with better software can eliminate a lot of duplication and manual effort, freeing up more time for higher-level or frontline work. Even more importantly, it ensures leaders are making decisions based on the most accurate and up-to-date information it is possible to have.
Paul Sparkes is commercial director for iplicit
Charity Finance wishes to thank iplicit for its support with this article
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