Restricted vs Unrestricted Funds: Why You Can’t Just Move Donor Money Around

Picture this: your feeding scheme received a R50,000 grant specifically earmarked for buying a new industrial fridge, but this month the electricity bill is due and the general account is running dry. Surely it’s fine to borrow from the fridge money temporarily, since it’s all going toward the same good cause anyway? It is not fine — and understanding why is one of the more important financial literacy lessons a grassroots NPO board can learn.

What “restricted” actually means

Restricted funds are donations or grants given for a specific, defined purpose — a new fridge, a particular programme, a building renovation, equipment for a specific project. The donor has attached conditions, whether formally in a grant agreement or informally in an email saying “this is for the new roof.” Once you accept that money on those terms, you’ve entered into an obligation to use it exactly as agreed — not “roughly in that direction,” exactly as agreed.

Unrestricted funds are donations given without any strings attached — general donations, unrestricted grants, or income the organisation generates itself. This is the money your board actually has discretion over: keep the lights on, cover admin costs, top up whatever’s running short this month.

The difference matters enormously, because mixing the two — even temporarily, even with the best intentions — is a breach of donor trust and, depending on the terms of the grant agreement, potentially a breach of contract.

A different category of risk: restricting funds to a named individual

There’s one type of “restriction” that deserves its own warning, because it’s not the same kind of problem as a fridge or a roof: a donor asking you to earmark a donation for one specific, named person. If your organisation holds PBO or Section 18A status, this is genuinely risky ground. SARS’s conditions for PBOs specifically prohibit distributing funds directly or indirectly to any particular person outside the course of carrying out an approved public benefit activity — and a donation is not accepted as a valid, deductible gift if conditions attached to it would let the donor (or someone connected to them) obtain a direct benefit from it.

A restriction naming one individual can look, to SARS, less like funding a public benefit programme and more like a private gift routed through your organisation — which can put both that donation’s deductibility and your organisation’s broader tax-exempt status at risk. If a donor wants to support a specific person’s need, the safer structure is usually to fund a defined programme or criteria-based fund (a bursary programme with published selection criteria, for instance) rather than a donation tied to one named individual. If you’re ever asked to accept a donation like this, it’s worth a conversation with your accountant before saying yes.

Why “we’ll pay it back next month” doesn’t cut it

1. Funders check. Most grant agreements require a report showing exactly how the restricted funds were spent, often with supporting invoices. If the fridge money paid the electricity bill for six weeks, that gap is visible in your bank statements the moment anyone looks closely.
2. Cash flow problems compound. An organisation that’s already stretched thin, borrowing from restricted funds to cover a shortfall, is treating a symptom rather than the underlying problem — and often ends up in a worse position a few months later when both the restricted obligation and the general shortfall need settling at once.
3. It damages the most valuable thing you have. Donor trust, once broken, is very hard to rebuild — and funders talk to each other. A reputation for careful stewardship of restricted funds is one of the strongest assets a small NPO can have when applying for the next grant.

How to actually manage this in practice

• Separate the money, not just the spreadsheet. Where possible, use a separate bank account or, at minimum, clearly coded ledger accounts for major restricted grants — don’t rely on memory to know what’s “really” available in the general account.
• Report against restrictions regularly, not just when a funder asks. A simple quarterly summary showing what’s restricted, what’s been spent against it, and what’s unrestricted keeps your board honestly informed and avoids nasty surprises.
• Build a genuine cash flow buffer in unrestricted funds. The real fix for “we’re tempted to dip into the fridge money” is having enough unrestricted reserve that you’re never in that position in the first place — which is a fundraising and budgeting conversation, not an accounting one.
• Get ahead of a shortfall, don’t cover it silently. If a funding gap is genuinely looming, the right move is an honest conversation with your board (and sometimes your funder) about the shortfall — not a quiet internal transfer nobody discusses.

The bottom line

Restricted funds come with a promise attached, and that promise doesn’t bend just because this month is tight. Keep restricted and unrestricted money visibly separate, report on both regularly, and treat any temptation to blur the line as a signal that your unrestricted reserves — not your bookkeeping — need attention.