Your Nonprofit Is Raising Money. So Why Can’t You Pay the Bills?
I hear nonprofit leaders say some version of this all the time: “We’re raising money. We just can’t pay our bills.”
At first, that almost sounds ridiculous. If money is coming in, why is the organization still struggling financially? In reality, the problem isn’t how much money the nonprofit is raising. It’s how much of that money the organization can actually use.
Programs may be funded. Grants may be coming in for specific initiatives with restriction on use of the funds. A couple of major donors might be excited about particular thing your nonprofit does and they’re giving to make that specific thing happen. Meanwhile, the nonprofit is struggling to pay for normal operational expenses (insurance, utilities, office space, etc.) required to keep the organization going.
The culprit? Restricted giving.
TL;DR: Restricted gifts aren’t bad, but too much restricted funding can leave a nonprofit unable to pay for the operations that make its programs possible. Nonprofit leaders should help donors understand the connection between operations and impact, establish guidelines for which restrictions they can responsibly accept, and make sure enough funding remains flexible enough to sustain the organization.
A restricted gift is simply a donation that comes with donor-imposed instructions about how the money can be used. The donor might designate the money for a particular program, equipment purchase, building project, or specific group of people. Some grants also restrict nearly all of the funding to direct program expenses, with no allowance for a portion of the gift to be used for operations.
Restricted gifts aren’t bad. They can fund tremendous work, and for a new or growing nonprofit, receiving a significant gift from someone who believes in what you’re doing can be incredibly encouraging.
The challenge comes when too much of your funding is restricted, because you can’t run programs without also running an organization.
When Restricted Giving Becomes a Problem
Someone still has to handle accounting, manage staff, maintain technology, oversee compliance, develop strategy, communicate with donors, and make sure the entire organization is functioning properly. None of those expenses are particularly exciting to feature in a donor report, but every one of them helps make the mission possible.
Strong operations are what make impact sustainable.
I know of a church that illustrates the problem almost perfectly. The church has struggled financially for years and has even faced the possibility of closing. At the same time, it has a significant amount of money sitting in the bank. The problem is that years ago, a family gave that money with instructions that it could only be used for maintaining the lawn of the cemetery next to the church, because the family's great grandfather is buried there.
There is enough money to mow that cemetery lawn for decades, but the church can’t use it to pay the bills that might keep the church open.
That may be an extreme example, but smaller versions of the same problem happen in nonprofits all the time. Money is technically available, but it can’t be used where the organization needs it most.
Most donors who restrict their gifts aren’t trying to make your job harder. They usually want confidence that their money will make a difference. They understand buying meals, sending a student to camp, providing medical care, or supporting a particular program. They may not naturally understand the staff, systems, technology, accounting, leadership, and administration required to make those things happen.
That means part of your job is helping donors connect operations to impact.
Help Donors Connect Operations to Impact
Years ago, I worked with a family raising financial support to serve with a nonprofit organization in Africa. The husband was an accountant, and that was going to be his role overseas. He wasn’t going to be the person out in villages doing the visible frontline work, so we built his fundraising message around a simple idea: every hour he spent handling accounting was an hour a frontline worker didn’t have to spend doing it.
His administrative work made more ministry possible.
Your nonprofit may need to make that same connection. Instead of apologizing for “overhead,” explain what healthy operations allow your organization to accomplish.
Sometimes this conversation also requires nonprofit leaders to recognize that saying yes to every restricted gift is not automatically good stewardship.
Imagine a donor calls tomorrow and offers your organization $50,000, but the gift comes with significant requirements. Before accepting it, you need to understand what those restrictions will require from your organization. Will the gift create additional staffing needs? Will there be significant reporting requirements? Will you need to spend unrestricted money to administer the restricted gift? Will the project pull your team away from other priorities?
A Large Donation Can Still Be an Expensive Donation
I am NOT saying that your first response to any gift with restrictions should be "Thanks, but no thanks." It means your response should probably include some good questions. What does the donor hope the gift will accomplish? How much flexibility do you have in how the money is used? Can some of the funding support the operational costs required to deliver the program successfully?
Those conversations can actually build trust because they show donors that you take their generosity seriously enough to steward it well.
Decide What Restrictions You’ll Accept Before the Gift Arrives
This is also why your board should decide ahead of time what kinds of restrictions your organization can responsibly accept. Don’t wait until a six-figure gift is sitting on the table. Once that happens, everyone will naturally begin looking for reasons to say yes.
Talk now about what restrictions are reasonable, when a gift might require more capacity than you have, and when accepting funding could pull the organization away from its mission or strategy.
Finally, let’s stop treating operations like whatever is left over after the “real work” gets funded. Certainly, you should spend carefully. Small nonprofits rarely have money to waste. But there is a difference between being financially responsible and starving your organization of the resources it needs to function well.
Take a look at your current funding and ask a simple question: How much of our money is actually available to operate the organization?
You may discover that your fundraising challenge isn’t simply that you need more donors. You may need to help donors better understand what makes your programs possible. And occasionally, you may need the courage to turn down money that could create more problems than it solves.
Make sure the generosity coming into your organization supports both the visible work donors care about and the foundation required to keep doing that work for years to come.
FAQ’s
What is a restricted gift to a nonprofit?
A restricted gift is a donation that a donor requires a nonprofit to use for a particular program, project, purpose, population, or expense. The nonprofit is responsible for honoring those restrictions once it accepts the gift.
Are restricted donations bad for nonprofits?
No. Restricted gifts can fund important programs and projects. Problems can arise when too much of a nonprofit’s funding is restricted and there is not enough unrestricted money available to pay for staffing, administration, technology, insurance, fundraising, and other essential operating expenses.
What is the difference between restricted and unrestricted donations?
Restricted donations must be used according to the donor’s stated purpose. Unrestricted donations give the nonprofit greater flexibility to use the money where it is most needed, including programs and operating expenses.
Can a nonprofit refuse a restricted gift?
Yes. A nonprofit should evaluate whether it can responsibly fulfill the donor’s restrictions before accepting the gift. A large donation may not be beneficial if fulfilling its requirements creates excessive costs, stretches staff capacity, or moves the organization away from its mission and strategy.
How can nonprofits encourage unrestricted giving?
Help donors understand how operations contribute to impact. Instead of simply asking donors to fund “overhead,” explain how staff, technology, financial management, leadership, and other operational resources make the programs they care about possible.