Miss the beginning of the series? Go to Common Nonprofit Mistakes (And Simple Solutions) Part 1: I Could Do It All, But I Shouldn’t.
There’s a modern saying we use at Aplos: “Fund Rich, Cash Poor.” It’s the simplest way to describe a nonprofit that has lots of money in the bank, but they can’t use it because it’s stuck in a fund with donor restrictions.
Over the years working as an accountant and financial advisor for nonprofits and churches, I’ve heard of too many organizations that struggle because their money is tied to restricted funds for specific projects, leaving them without enough unrestricted money to cover the bills. This is especially common in churches that create a new fund for each special giving campaign.
It can be tricky to create a fund accounting system that doesn’t put your organization in a tough financial spot. Let’s hear the story of how Molly found herself in this dilemma.
Molly here. There are many things I love about directing our nonprofit animal shelter, but the bookkeeping is probably my least favorite. Unfortunately, I had to put my financial management skills to the test this week.
We had held a successful fundraising event and reached our donation goal to cover the costs for a few special projects. Our kennels were run down. Most days, the water wouldn’t turn on because a pipe out back would break. Our A/C was so stubborn that it only turned on when it felt like it (and sometimes it decided to turn on the heater instead of the A/C).
We needed about $20,000 for the upgrades. At the event, we ended up receiving about $15,000 in donations for this purpose. We still had a little more fundraising to do before we could begin remodeling, but it was a great start.
We also set out donation boxes at the event for our special medical expenses, and the spay and neuter program. We received about $5,000 for each of these.
Also, we made about $8,000 in lunch ticket sales that could be placed in the general fund for everyday expenses.
I sat at my desk updating our books when my volunteer, Janey, came in to tell me our food inventory was low. Not a problem! We just received $33,000 in donations. There should be enough to cover the food.
As I took a closer look, I realized the $8,000 in our general fund was going to be spent quickly to pay other bills.
At this point, I was very concerned. I should have raised more money for our general fund so we wouldn’t have to cut it so close each month. I was pretty sure I couldn’t borrow money from the facility fund and then put it back when I received another donation, but I figured it was worthwhile to check.
I called my board member Roland, the “money guy.” Roland responded loud and clear, “Absolutely not. You told everyone at the event that the money raised was for those special projects. If you have a good relationship with any of the donors and haven’t deposited their checks yet, you could call them and offer to send them their check back and ask them to write you a new one for your general fund.”
He had a point. I didn’t provide information at the event regarding terms for transferring designated donations, so there was no way of getting around this without contacting my donors first.
Taking his advice, I reached out to a handful of donors I knew well. It was uncomfortable, but I asked if they would let me reallocate the donation. Fortunately, my donors appreciated my effort and were glad to write me another check.
I got pretty lucky this time, but I wish I had been proactive and just asked them for general donations instead of asking them to sponsor a specific fund. This way, I could have divided up the donations the way we needed them.
I was very thankful that I had a good relationship with the donors I called, but I needed to start building relationships with the others. My first attempt at donor relations cost me a little more than just my time. But I’ll fill you in on that next time.
How To Complicate Your Fund Accounting Fast
Where did Molly go wrong? She was using fund accounting correctly to track donations for special programs. However, she didn’t have a proactive approach when asking for donations, so she created too many specific funds.
I have seen other organizations that found themselves in similar positions. They had thousands in the bank, but they were on the verge of bankruptcy because all of their money was locked into funds they couldn’t use for what they needed.
So why does this happen? Many organizations base their fundraisers around raising money for a specific purpose. I don’t consider this a mistake, but there are proactive ways for your organization to approach collecting donations for certain projects without putting yourself in a financial pinch.
Ask your donors to fund your organization itself rather than a specific fund. Let them know the donations you receive will be put toward a number of projects. This will help you avoid fund overload.
Confused? Think of fund accounting as a pair of cargo pants. You can have a pair that has a normal amount of pockets, but sometimes pocket overload can occur.
You may have $100 carried in various pockets in these pants, but only $5 in your wallet for operating expenses. If you want to learn more about fund accounting, check out Aplos Academy’s lesson: “What Is Fund Accounting?”
When Fund Accounting Is Necessary
Fund accounting can be tricky, so do you really need it for your nonprofit or church? In most cases, yes. That is why I founded Aplos to provide simple fund accounting software for nonprofits.
Let’s say you were given a $10,000 grant for a special program. You deposit the money into your bank account, and weeks later, after spending some of it, you decide to see how much of the grant you have left. Unless you were using fund accounting to track that fund’s balance, you wouldn’t know how much of the money in your account remains for that special program.
When creating a fund account, remember this rule of thumb: If you need to know what the balance of the fund is at any given time, it probably needs its own fund.
If a project doesn’t fit in these categories, it may be more appropriate to track the income and expenses using a line item in your budget. This way, you reserve the power to reallocate the money as needed but you can still monitor your spending.
How To Fix A Fund Disaster
If you find yourself in Molly’s position, it is time to get some serious professional advice. Make a game plan for how you want to manage your funds going forward, and determine what your options are if you ever need to move money into different funds. There may be restrictions based on the types of parameters you have set for each fund.
It may be necessary to be transparent with your donors. If you need to reallocate money to different funds, you will need to go back to those who donated and ask for permission to move the money they donated to different funds. Be prepared. They have the legal right to refuse and may even ask for their donations to be returned.
The Art Of A Disclaimer
If you decide to fundraise for specific projects, disclaimers can create more financial flexibility, while still maintaining your trust with donors. Provide a disclaimer on your donation form that details the terms of the funds and how they will be used.
You can set up the disclaimer in a couple of different ways:
- When you are asking for donations, have a clear message to your donors that funds will be applied to the General Fund and used to support the overall mission of your organization.
- If you do create separate funds, you can state that if the fund reaches the targeted goal, then the rest will be reallocated to the General Fund.
Remember, even with a disclaimer, if you intend to reallocate funds, it is a best practice to notify your affected donors and ask them to rewrite the check. Your transparency will preserve their trust.
Fund accounting can be intimidating. But if you have the right guidance and go in with a proactive strategy, it will be your best asset. How do you use funds to manage the finances of your organization? Leave a tip in the comments section below.
Up Next: Part 7
In Part 7, we will look at donor relations and why it helps to have a plan so all of your donors will know how much they matter to you.
