Imagine walking into a board meeting and seeing a large deficit on the financial statements.
Concern spreads quickly. Are expenses too high? Did revenue projections miss the mark? Is the organization at risk?
But what if the deficit isn’t operational at all?
In many nonprofits, what looks like a budget shortfall is actually a restricted fund timing issue. Revenue may have been received in a prior year, while the related program expenses are recorded later. Without clear nonprofit fund tracking, financial reports can appear alarming even when the organization is financially stable.
This scenario is more common than most leaders realize. When restricted funds, unrestricted funds, and board-designated reserves are not clearly structured, boards may misinterpret results, donors may question transparency, and staff spend valuable time explaining numbers instead of advancing the mission.
The real issue usually is not overspending. It is unclear nonprofit accounting structure.
Strong fund tracking creates clarity around:
- Which funds are truly available to spend
- When restricted funds can be released
- How to prevent misleading financial “deficits”
- How to improve nonprofit financial reporting for boards
If your leadership team cannot quickly explain whether a reported deficit is operational or simply timing-related, your system may need simplification, not expansion.
Nonprofit leaders often face a frustrating question:“Which money can we actually use right now?”
You are not alone. Most nonprofit accounting systems were not built for today’s mix of grants, donor restrictions, and board reserves. When funds are not tracked clearly, boards can misread results, donors can lose confidence, and staff end up stuck in spreadsheets.
The fix is usually not a bigger chart of accounts. At Accountix, we have found it requires a clearer structure and shared language. That is why we created Tracking Designated and Restricted Funds: The Key to Transparent, Compliant Nonprofit Accounting, a practical guide that helps nonprofit leaders eliminate confusion, protect donor trust, and report with confidence.
What you will learn from this whitepaper
By the end, you will be able to:
- Distinguish restricted, unrestricted, and board-designated funds using simple language
- Explain what a release is and why it changes what is usable
- Set up a lightweight system for tracking restricted balances without bloating your chart of accounts
- Give your board clearer reporting that supports confident decisions
Three categories every leader should know
- Restricted funds: Money with donor instructions. It must be used for a specific purpose or timeframe.
- Unrestricted funds: Flexible funding for general operations.
- Board-designated reserves: Unrestricted money the board sets aside for a defined purpose.
A key term is the release. A release means you have met the donor requirements, so the funds can be used as intended and reflected accurately in reporting.
Four steps to improve fund tracking
- Keep your system simple. Use dimensions like Projects or Classes instead of bloating the chart of accounts.
- Review restricted balances monthly. Track what came in, what was spent, and what remains.
- Document board designations in meeting minutes.
- Align internal reports, donor reports, and Form 990 so they tell the same story.
Download the full guide for templates, a release log, and a restricted fund rollforward example.
