Why charity finance teams could have to spend more time dealing with restricted funds

Charities are likely to spend more time grappling with the complexities of restricted funding after signs that a rising number of grant awards will come with more strings attached. 

The number of charities receiving unrestricted funding rose sharply around the time of the Covid crisis, from 46% in 2019 to 60% in 2022, according to a recent Third Sector Report. But that figure may be set to fall, with more funders attaching their grants to specific projects and purposes.

The report said grant makers were facing a conundrum: “Should they continue to rely on trust in the way they offer grants – or refocus attention on specifics so they can account for the impact they achieve?

“During the pandemic, many grant makers were thinking hard about future strategy, suggesting that unrestricted funding may become less common again when objectives are closely aligned with specified social goals.”

What restricted grants mean for finance teams

Dorset-based Lewis-Manning Hospice Care is used to dealing with restricted funding. 

The charity’s Trusts Fundraiser, Claire Warren, says: “Since Covid, I’ve seen an increase in the number of people applying for funds from trusts and foundations. I think that has made the trusts reflect and tighten their criteria, so I think perhaps they’re going back to restricted funding in order to minimise the number of people that apply to them.”

She says this makes it ever more challenging to fund core costs such as salaries, which make up most of Lewis-Manning’s budget.

“Some trusts used to support revenue applications and are now focusing on capital where hospices are concerned,” she says.

Katie Hewitt, Director of Finance and Operations for the charity, which is an iplicit customer, says: “I would say 80% of our funding is restricted. Some funders might have moved away from restricted grants during Covid but I think they will have gone back to it.”

She adds: “Some grants are called restricted but are not overly restricted. We tend to apply for grants for a project and our project cost might include time and management costs. We have quite a lot of grants for our day hospice service, for instance, we can spend that on anything involved in delivering the service.”

Claire adds: “Our hospice is really salary-based. The major cost affecting the people we help is salaries. But some trusts will specifically say ‘We will not fund salaries’ and that limits us very much.”  

Complications of dealing with restricted funding

Having a lot of restricted funding in your budget means there is a great deal to keep track of and report on. The funders will be keen to hear how their money has been spent – and auditors will want evidence that it has been ring-fenced for the intended use.

For smaller charities, pulling information out of the finance system and tracking it in spreadsheets will usually suffice. But as a charity grows in scale and complexity, a more sophisticated tool will be needed. 

Louise Zandstra, Director of Finance and Enterprise at The Charleston Trust – which looks after the East Sussex home and gardens of the painters Vanessa Bell and Duncan Grant – has a lot of experience of how complicated finances can get for arts and culture organisations.

“There's a real mix of commercial and charitable aspects, with complexity coming from restricted funds and grant funding and also Cultural VAT Exemption and Museums and Galleries Tax Relief. It makes reporting complicated because you need certain information pulled together in different ways,” she says.

When she joined the trust, it was struggling with its Sage finance system.

“We didn’t have Sage set up to deal with restricted funds, partial VAT exemption, all of these things which are quite standard for charities,” she says.

“What I saw when I arrived was a very basic system that had accumulated a lot of clutter over the years and everything else was done on spreadsheets outside the system.” 

Darren Tiffney, Director of Finance and Central Services at Yorkshire Wildlife Trust, is responsible for a £13m annual budget which includes many grants, donations and legacies restricted to specific projects. 

His team uses the project accounting features of iplicit to track and report on all of these. 

“This assists us in producing our end-of-year fund recognition sheet that shows the movement of all funds. Some charities are funded by just three or four funders, but we have over 100 active funds at any one time,” he says.

It seems clear that charities will have to keep on top of the complexities of restricted funding. 

At Lewis-Manning, where grants from trusts cover around £260,000 of the £3.4m annual costs, Claire Warren says: “We’re always overjoyed when somebody understands how we work and says, ‘We’ll give you core funding, spend it on whatever you need’.  But we only get about four or five of those grants a year.” 

Learn more about iplicit

iplicit’s cloud accounting software has been designed to drastically simplify reporting for charities, including the management of restricted funds. Find out how iplicit helps charities solve accounting and reporting challenges or contact iplicit for more information. 

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