Restricted funds are funds that have been acquired through donors for a specific project or activity. Unrestricted funds are those funds that have been raised to support the work of a charity or NGO but without a designated use. The two should be kept separately in accounts for transparency and to be able to show donors how and where the money is being spent.
Raising unrestricted funds is always challenging for NGOs because typically, this money can be used to support the operational costs of the organisation as well as applying some funds for projects. Many NGOs fail to plan for unrestricted funds in their fundraising and so become tied to only carrying out activities according to certain grants they secure. For example, some staff who work on specific projects are paid through the grant that was secured to deliver the work. However, if the grant is time-limited such as one, two, three years for example, then the staff working on the project may need to be made redundant when the project comes to an end. This is why securing unrestricted income is so important although many NGOs struggle to know how to do this.
Unrestricted income can come through a variety of sources such as individual donations, public appeals, fundraising through schools where schools might do fundraising activities on your behalf, public and private events or through companies.
Restricted funds are usually sourced through grant-making bodies for a particular piece of work. In a proposal for funding, usually, an NGO would be stated quite clearly what it is aiming to achieve, and how it will deliver the set project. Proposals might include a budget with an explanation of the project team and key workers and how much funding is required to support their salaries. Or for smaller grants, there may be a request to fund a particular element of a larger project. For example the salary cost of a key worker, or it may be tangible items such as computers, or school books. Whatever has been asked by way of the grant, must be used for the purposes it was intended. By putting the funds into different accounts, it is easier to keep track of where and how the grant is spent and is easier for financial reporting.