A financial reality check for executive directors who think the money is gone when it’s actually sitting right in front of them.

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I’ve sat across the table from more than a few executive directors who opened the conversation the same way: “We’re running out of money.” Their voice carries that particular mix of urgency and exhaustion that comes from staring at a bank statement that doesn’t match the story they’re being told in their financial reports.

Here’s what I’ve found nearly every time: the organization isn’t broke. The cash is there. What’s broken is the way restricted funds are being tracked, reported, and understood — and that misunderstanding is driving panic where there should be clarity, and paralysis where there should be strategic action.

If you lead a nonprofit and you’ve ever looked at your financials and felt confused about how much money you actually have to work with, this post is for you.

The Restricted Funds Confusion

Every nonprofit deals with restricted funds. A donor gives $50,000 for your after-school program. A foundation awards $200,000 for a capital campaign. A government contract reimburses you for specific program expenses. These dollars come with strings attached — they can only be used for the purpose the donor or grantor specified.

The problem starts when your accounting system, your reports, or your finance team treats these restricted dollars as if they exist in a completely separate universe from the rest of your cash. They don’t. Restricted funds sit in the same bank account as your unrestricted funds. They’re not locked in a vault somewhere. They’re not gone.

But when your monthly financial report shows $400,000 in temporarily restricted net assets and only $60,000 in unrestricted net assets, it’s natural to feel like you’re operating on fumes. That $60,000 feels like all you have. Meanwhile, the $400,000 feels untouchable — abstract money that belongs to someone else.

This is the misread. And it’s costing you sleep, strategic momentum, and sometimes staff.

What’s Actually Happening

Restricted funds represent an obligation, not a loss. When a donor restricts a gift to your youth mentoring program, and you run a youth mentoring program, that money is going to be spent on exactly what you were already planning to spend it on — staff salaries, supplies, facility costs, and program delivery. As those expenses are incurred, the restriction is released, and the funds move from temporarily restricted to unrestricted on your statement of activities.

Where it becomes a real problem is when restrictions don’t align with your spending, when releases aren’t being recorded properly, or when your chart of accounts doesn’t give you visibility into what’s restricted, what’s been released, and what’s truly unencumbered.

The Three Places This Goes Wrong

In my experience working with nonprofit financials, the restricted funds confusion typically traces back to three root causes.

The first is sloppy release tracking. Expenses hit the books, but nobody processes the corresponding restriction release. So your temporarily restricted balance stays inflated month after month, and your unrestricted balance looks artificially low. Your P&L shows a deficit that doesn’t actually exist because the revenue side is trapped in the wrong bucket. I’ve seen organizations report six-figure operating deficits that evaporate completely once restriction releases are properly recorded.

The second is a chart of accounts that wasn’t built for fund accounting. Many nonprofits inherit their chart of accounts from whoever set up QuickBooks five years ago, and it was never designed to track restrictions at the level of detail you need. Revenue comes in and gets coded to one big restricted bucket. Expenses go out coded by function. There’s no systematic connection between the two. The result is a financial picture that’s technically accurate in aggregate but completely useless for decision-making.

The third — and this one is the most damaging — is board-level misunderstanding. When financial reports go to the board without context, board members see that small unrestricted number and panic. They start pushing for austerity measures, hiring freezes, or emergency fundraising campaigns — all based on a number that doesn’t reflect the organization’s actual financial health. I’ve watched boards delay critical hires for months because they were reading the wrong line on the balance sheet.

The Real Number You Should Be Watching

Instead of fixating on unrestricted net assets as your measure of financial health, you need to understand your available liquidity — the cash and near-cash assets you can deploy in the near term, accounting for both restricted obligations and upcoming commitments.

Here’s a simplified way to think about it: start with your total cash and investments. Subtract any restricted funds that haven’t yet been spent on their intended purpose but will be in the normal course of operations over the next 90 days. Subtract any payables or committed expenses. What’s left is your true operating cushion.

For most nonprofits I work with, this number is significantly higher than the unrestricted net assets line on their statement of financial position. Sometimes two or three times higher.

That doesn’t mean you can spend recklessly. It means you can make decisions from a place of clarity rather than fear.

What This Looks Like in Practice

Consider a mid-sized human services organization with $500,000 in the bank. Their statement of financial position shows $380,000 in temporarily restricted net assets and $120,000 in unrestricted. The executive director sees $120,000 and thinks they have six weeks of runway.

But when you dig in, $280,000 of that restricted money is for programs that are actively running — staff are on payroll, rent is being paid, services are being delivered. Those restriction releases should be hitting the books monthly as expenses are incurred. Another $60,000 is a time-restricted gift that releases in 45 days.

How to Fix This

If any of this sounds familiar, there are a few concrete steps you can take immediately.

Start by running a restriction schedule — a simple spreadsheet that lists every restricted gift, the restriction purpose, the original amount, how much has been spent, and the remaining balance. If your finance team can’t produce this in 48 hours, that tells you something important about the state of your fund accounting.

Next, look at your monthly financial reports through the lens of restriction releases. Are expenses being matched with corresponding releases? If your program spent $40,000 last month on a restricted grant, did $40,000 move from temporarily restricted to unrestricted revenue? If not, your operating results are being understated.

Then, redesign how you present financials to your board. Add a liquidity summary that shows total cash, restricted cash committed to active programs, restricted cash not yet deployed, and true available operating funds. Give your board the number that actually matters for governance decisions.

Finally, audit your chart of accounts. Every major restricted funding source should have its own revenue and expense tracking so you can see at a glance whether restrictions are being fulfilled and released on schedule.

The Bigger Picture

The restricted funds misread isn’t just an accounting issue — it’s a leadership issue. When executive directors don’t have clarity on their true financial position, they make conservative decisions that cost the organization momentum. They delay hiring a development director who would bring in three times their salary. They underfund programs that funders are literally paying them to run. They go to the board with a scarcity narrative when the reality is much more nuanced.

Your nonprofit probably isn’t broke. But if your financial infrastructure can’t show you the difference between restricted obligations and genuine shortfalls, you’ll keep making decisions as if it is.

The organizations that thrive aren’t the ones with the most money. They’re the ones with the clearest picture of the money they have.