Restricted funds could be making a comeback – and that’s a headache for finance teams

CHARITIES might dream of a day when all funders trust them enough to award money that can be spent wherever it’s most needed. 

But that is not the world we live in – and the complications caused by restricted funds could be set to multiply.

According to the Third Sector Trends 2023 report, titled People, Places and Policy, the number of charities receiving unrestricted funding rose sharply around the time of the Covid crisis, from 46% in 2019 to 60% in 2022. However, the report noted that the situation could be set to change, with more funders attaching their grants to specific projects and purposes.

The report summed up the conundrum for funders: ‘Should they continue to rely on trust in the way they offer grants – or refocus attention on specifics so they can account for the impact they achieve?

‘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.’

Restricted grants in action

Dorset-based Lewis-Manning Hospice Care is used to dealing with restricted funding. 

The charity’s Trusts Fundraiser, Claire Warren, said:

“Since Covid, I’ve seen an increase in the number of people applying for funds from trusts and foundations. I think that has made the trusts reflect and tighten their criteria, so I think perhaps they’re going back to restricted funding to minimise the number of people that apply to them.”

She says this makes it even more challenging to fund core costs such as salaries, which make up most of Lewis-Manning’s budget.

She said:

“Some trusts used to support revenue applications and are now focusing on capital where hospices are concerned.”

Katie Hewitt, Director of Finance and Operations for the charity, said:

“I would say 80% of our funding is restricted. Some funders might have moved away from restricted grants during Covid but I think they will have gone back to it.

“Some grants are called restricted but are not overly restricted. We tend to apply for grants for a project and our project cost might include time and management costs. We have quite a lot of grants for our day hospice service, for instance, we can spend that on anything involved in delivering the service.”

Claire added:

“Our hospice is really salary-based. The major cost affecting the people we help is salaries. But some trusts will specifically say ‘We will not fund salaries’ and that limits us very much.”  

How to track restricted funding

Having a lot of restricted funding in your budget means there is a great deal to keep track of and report on. The funders will be keen to hear how their money has been spent – and auditors will want evidence that it has been ring-fenced for the intended use.

For smaller charities, pulling information out of the finance system and tracking it in spreadsheets will usually suffice. But as a charity grows in scale and complexity, a more sophisticated tool will be needed. 

Darren Tiffney, Director of Finance and Central Services at Yorkshire Wildlife Trust, is responsible for a £13m annual budget which includes many grants, donations and legacies restricted to specific projects. 

He moved the trust from Exchequer finance software to iplicit as part of a digital transformation taking place across the organisation. His team uses iplicit’s project accounting features to keep track of the restricted funds.

He said:

“This assists us in producing our end-of-year fund recognition sheet that shows the movement of all funds. Some charities are funded by just three or four funders, but we have over 100 active funds at any one time.”

It seems clear that charities will have to keep on top of the complexities of restricted funding. 

At Lewis-Manning, where grants from trusts cover around £260,000 of the £3.4m annual costs, Claire Warren said:

“We’re always overjoyed when somebody understands how we work and says, ‘We’ll give you core funding, spend it on whatever you need’. But we only get about four or five of those grants a year.” 

• iplicit’s cloud accounting software has been designed to drastically simplify reporting for charities, including the management of restricted funds. Find out how iplicit helps charities solve accounting and reporting challenges or contact iplicit for more information.