Portrait of Nancy Johnson

by Nancy Johnson

Partner at Han Group

Receiving unrestricted funds can be a blessing for any nonprofit, but the key to leveraging a windfall is in how well you plan. 

The best gifts come without strings attached. For nonprofits, these come in the form of unrestricted funds. These donations allow organizations the freedom to use or distribute the money where they see fit.

Approximately 240 billionaire philanthropists have signed the Giving Pledge, promising to give away half of their wealth over the course of their lifetime. Most organizations dream of receiving millions in unrestricted funding but oftentimes, nonprofits receive unexpected gifts from bequests or private foundations. They may need guidance on how to manage that money in the most efficient manner and assess the financial and tax impacts on the organization.

Even if your organization isn’t expecting to receive an unusually large donation anytime soon, here are some best practices to keep in mind that apply to any new gift of unexpected funding.

Plan First, Then Spend

Unexpected influxes of donations without any restrictions or conditions can seem like a windfall for nonprofits, but smart organizations will take a strategic approach to put these funds to the best use. Developing a plan is key to prioritizing where extra dollars should go and ensuring they have the greatest impact.

Nonprofits should think through how one-time donations fit into their long-term goals and establish a roadmap for directing funds to priority programs or operational capacity building. For example, new unrestricted funding could expand services, invest in technology upgrades, or even build a reserve. Having management and the board working together provides clarity across the organization. Developing (or revising) a strategic plan is considered a best practice.

It’s also critical to consider sustainability if a major funding source is unlikely to continue at the same level in the near future. Nonprofits could see income spike for a single year, then plummet. Careful planning and conservative budgeting for ongoing expenses, including maintaining your reserves, will help avoid painful cuts down the road should additional unrestricted donations fall below expectations.

Weigh the Risks

While unexpected streams of unrestricted funding are considered absolutely helpful, nonprofits need to keep an eye out for potential tax exemption risks.

A large donation from a nonpublic entity, such as a corporation or private foundation, over a number of years could impact their public charity status on the Internal Revenue Service Information Return Form 990 if the nonprofit is not also funded from other public sources, including the government.

In addition, a donation concentration from a single major donor represents both an inherent sustainability risk and a concentration risk. If that funding source ends, it could mean cuts to important programs. New financial statement footnote disclosures may be necessary to report the revenue concentration. Concentrations may also impact the 990 Schedule A public support calculation.

Engage Your Team

Since significant influxes of funding can impact budgets, systems, and plans, it’s wise to loop in the accounting and finance teams early when unusually large gifts are expected or received.

A best practice would be to engage with your accounting partners to walk through the grant agreements for the unusual donations as soon as they appear. They can provide guidance on modifying budgets, setting up new cost centers, or a new chart of account line items.

On the auditing side, early conversations allow your audit partner to factor major gifts, pilots, or program expansion into their audit planning.

The earlier the accounting and finance teams understand shifts that impact funding levels, overhead rates, investment mixes, or reporting metrics, the better they can design appropriate accounting systems, processes, and staffing models to account for and harness funding most effectively.

Since Han Group specializes in nonprofits, we have deep expertise and experience when it comes to finding solutions to the unique challenges these organizations face. There is no one-size-fits-all plan. Our commitment is to help your organization’s financial story shine brightly.

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