Maintaining a healthy reserve ratio is vital for non-profit organizations (NPOs). In a prior post, we discussed the different types of reserve funds and their importance in preserving financial sustainability. Now, it’s time to consider the role of management and non-profit boards in managing reserve funds. NPO executives are ultimately responsible for ensuring:
- Nonprofit operating reserve and restricted funds are spent appropriately
- Reserve fund activities are properly tracked
- Documentation and transactions involving restricted funds are organized and accounted for in the event of an audit by the fund provider
Five Bookkeeping Best Practices for Managing Your Restricted Funds
15 Must-Track Metrics & KPIs for Nonprofit Success
1. Set up separate bank & investment accounts
Establishing separate accounts for your non-profit’s regular banking and reserve investments will make tracking interest income and expenses relating to specific funds easier.
- Separate Accounting Codes: Use distinct accounting codes or fund accounts to track restricted funds separately from unrestricted funds.
- Bank Accounts: Consider maintaining separate bank accounts for large restricted funds to prevent commingling. Using separate accounts lets you capture transactions in their appropriate classes more effectively, and also improves reporting accuracy, reduces ambiguity, and makes your monthly reconciliation process more straightforward.
- Detailed Records: Keep meticulous records of all restricted funds transactions, including receipts, expenditures, and interest earned.
- Regular Reconciliation: Reconcile accounts regularly to ensure accuracy and compliance with donor restrictions.
2. Monitor Fund Usage, Reporting, Maintain Transparency
It is helpful to create and share a single fund summary document. It will help keep the restrictions and reporting requirements for separate funds clear to management and staff. Rather than relying on documentation alone to guide appropriate spending, however, you may also want to clarify fund restrictions with everyone in advance at a granular, transactional level. At the broadest level, this includes:
- Budget Alignment: Ensure that expenditures align with both the donor's restrictions and the organization's budget.
- Project Oversight: Monitor projects funded by restricted donations to verify that objectives are being met within the stipulated timelines.
Reviewing transactions every month can:
- Confirm funds are being used in accordance with their restrictions
- Check that staff aren’t coding transactions to the wrong classes or categories
- Keep your books accurate and up-to-date over the long term
If allocation errors are being made, catching them early will allow you to work with staff to correct and prevent them. Along with monitoring comes reporting, which must include:
- Internal Reports: Provide regular updates to management and the board on the status of restricted funds.
- Donor Reports: Update donors on how their funds are used and the impact achieved, reinforcing trust and engagement.
3. Leverage Technology and Use Class Tracking Functionality in your Bookkeeping Software
If your non-profit organization has several operating reserve or restricted funds, you should use the fund accounting method for reporting purposes. Leverage software to simplify fund bookkeeping to minimize errors and help clarify what could become complex financial management.
- Financial Management Software: Utilize software that supports fund accounting to enhance accuracy and efficiency.
- Automation: Automate reporting and alerts for restricted fund balances and usage to stay proactive in compliance.
By leveraging the class tracking functionality in your bookkeeping software, you can:
- Capture revenues and expenses relating to specific funds
- Make sure funds are used in accordance with any restrictions
- Eliminate the messy bookkeeping that can result when the right processes and controls aren’t in place
Let’s look at an example.
Imagine your organization runs a hot lunch program for elementary school kids in East Vancouver, funded by a local business. The funding covers the cost of the meals but not the delivery fee.
You hire a local restaurant to cater the meals and deliver them to the appropriate schools. Then, following the first lunch session, the restaurant sends you an invoice for $450: $430 for the meals + $20 for delivery.
When entering your payment into your bookkeeping software, you would:
- Categorize both the meal and delivery costs as program expenses
- Flag the meal portion of the transaction under the “Hot Lunch Program” class
That way, when you filter your reporting by class, you’ll see only the $430 meal amount attributed to your Hot Lunch Program fund.
Class tracking functionality streamlines reporting obligations and helps you stay accountable. Generating Profit & Loss statements by class for funders and board members makes it easier for them to review the revenues and expenses for specific funds.
4. Plan for Unused or Surplus Funds
Should a fund end up in surplus, having preset procedures to manage this is important from a bookkeeping and donor management perspective. Consult with legal advisors when unsure about reallocation to avoid potential breaches of fiduciary duty. Establish protocols for seeking donor permission to reallocate unused funds if the original purpose has been fulfilled or is no longer viable.
The reverse situation also requires contingency planning, which should include:
- Risk Management: Identify potential risks related to restricted funds and develop mitigation strategies.
- Crisis Planning: Have plans in place for financial emergencies that could affect restricted funds.
5. Train Your team
Never underestimate the importance of keeping everyone in the loop. Every team member needs a clear understanding of how various funds can be used and how they must be tracked.
Fixing ongoing mistakes after the fact can be painful and costly. If, for instance, your bookkeeper doesn’t understand how the income or expenses for various funds need to be tracked, unravelling what’s been done later can be very complicated.
In summary:
- Train your staff on how to code reserve fund-related expenses before they start using the funds
- Compile the restrictions and reporting requirements for all funds in one central document so your team can refer to it as needed
- Review fund transactions monthly to catch accounting and reporting errors before it’s too late
If your management team or board of directors needs help managing reserve funds, we can help! At Enkel, we have experience working with a variety of nonprofits to provide accurate, reliable fund accounting. Contact us to learn how we can help you manage your organization's books.
