The bank statement shows £8,000 arriving in April. It is now November; the accounts are being prepared, and nobody can say with certainty whether that money was for the youth project or for general funds. Somebody thinks there was an email. The person who would know left in July.
This is not a bookkeeping failure. It is a missing step of about five seconds – recording what the money was for at the moment it arrived, rather than working it out eight months later from memory. Charities that get this right are not better at accounting. They just capture the restriction while it is still obvious.
If your board is not confident about which money is actually free to spend, our charity governance support covers the financial controls that make the answer routine.
Why restrictions get lost between the bank and the ledger
Restricted money reaches a small charity by several different routes, and the restriction almost never travels with it.
A trust makes a bank transfer, and the conditions sit in a grant agreement saved in somebody’s downloads folder. A fundraising platform pays out a batch from an appeal, and what makes that money restricted is the wording on the appeal page rather than anything attached to the payment. A supporter sends a cheque with a note saying which part of your work they want it to go to. A collection at a named event produces cash, and the restriction was created by what the event was advertised as.
By the time any of it reaches your bank statement, it is a number and a date. Everything that made it restricted lives somewhere else; an inbox, a web page, a piece of paper, or nowhere at all beyond what somebody said at the time. Our guide to restricted and unrestricted funds sets out how each of those routes creates a restriction and why implied intent counts as much as a written condition.
There is a second gap, and it is organisational rather than technical. The person who sees the restriction first is often not the person who sees the money first. A fundraiser knows what the appeal promised. A project lead knows what the trust agreed to fund. The treasurer sees a payment land. If nothing connects those two people, the restriction is lost at the point of arrival, and everything afterwards is reconstruction.
What to capture at the point the money lands
Five things, and none of them takes long:
- the date it reached the bank
- the amount actually received, net of platform fees
- where it came from
- which fund it belongs to
- where the evidence of the restriction is kept
That last one is the one everybody skips, and it is the difference between a record and a recollection. It does not need to be elaborate. A note saying which folder the grant agreement is in, or that the donor’s email is filed under their name, or which appeal the platform payout relates to. One line, written while it is still obvious.
The evidence itself varies with the route. A grant agreement or funding letter. A donor’s covering email or the note that came with a cheque. Your own appeal wording, which is the evidence when the restriction was created by what you asked for rather than by anything the donor wrote. Sometimes an event description or a poster. Keep whatever it is with the donation record rather than in a separate inbox, and our guide to charity record keeping covers how long you need to hold it.
Where the position is genuinely unclear, ask; and ask now rather than at year-end. A short message to a donor or a trust asking whether they intended the gift for a particular purpose is a normal thing to send in the week the money arrives, and an awkward thing to send in month eleven.
Naming funds so the classification does itself
Most small charities treat classification as a judgement made at year-end. It works far better as a structural decision made once.
Give every restricted fund the name of the thing it is restricted to – the youth programme, the minibus appeal, the winter fuel fund. Keep one general line for money that arrived without conditions. The restriction is created by the donor or the grant, not by where you record it, but once the lines carry the purposes, recording the payment and recording the restriction become the same action. Nobody has to remember a second step.
This is also the answer to a question small charities ask constantly. You do not need a separate bank account for each fund. The Charities SORP requires separate accounting for fund types, not separate banking, and one account with a properly structured record does the job. Our guide to charity accounting covers what the fund split has to show.
One caution on naming. Be careful what you commit to. A fund called the building fund, created because one supporter gave for a building, becomes the destination for anything anyone later gives towards a building; and if the building does not happen, that money has to be dealt with rather than quietly absorbed.
A running record beats a year-end reconstruction, and it does not need software.
Our Charity Income Tracker is an Excel workbook for recording income by fund and source as it reaches the bank, month by month. Name your funds once and the restricted or unrestricted split fills itself in as you type, with a full-year total by fund at the end and a running Gift Aid log alongside. It covers the income side of the picture – what arrived and what it was for – and hands your accountant a clear starting point instead of twelve months of guesswork.
The habit that replaces the year-end scramble
Half an hour a week is enough, and it replaces weeks of archaeology at year-end.
Four checks. Everything that arrived has a fund against it. Anything unclear has been chased while the person who knows still remembers. Appeal income has been checked against what the appeal actually said, because that is where restrictions get created without anyone intending to create them. And the running totals by fund are visible to whoever needs them.
That third check earns its place. If your appeal page asked for help buying a minibus, every payment that came in against it is restricted to the minibus; whatever individual donors thought they were supporting, and whatever the charity now needs the money for. Catching that in month two is a conversation. Catching it in month twelve is a problem.
The weekly or monthly review is also where a pattern becomes visible long before it becomes urgent: how much of your income is restricted at all. A charity where nearly everything arriving is tied to a named purpose has a structural problem rather than a cash flow one, because the rent, the insurance and the finance work still have to be paid from somewhere. That is the same money your reserves policy is about, and it connects directly to what a project actually costs to run; if restricted income never carries its share of support costs, unrestricted funds absorb the difference every time.
Seen early, that is a fundraising question with time to answer it. Our marketing and fundraising support is often about exactly this – building income that is not all tied to somebody else’s purpose.
What you need to be able to answer
Four people will ask, and only one of them is a funder.
- A funder or trust, reporting on what their money paid for and when
- A donor, asking what happened to the gift they gave for a particular purpose
- Your examiner or accountant at year-end, needing the fund split and the evidence behind it
- A trustee, asking how much of the money in the bank the charity is actually free to spend
That last one is the most useful question on the list and the one nobody asks until it is too late. A bank balance of £40,000 sounds comfortable until you know that £31,000 of it is committed to three named purposes. That is precisely the figure trustees need in quarterly financial oversight, and it should sit alongside the budget rather than being produced on request.
Records kept as the money arrives answer all four quickly. Records reconstructed at year-end answer them slowly, and with a degree of confidence nobody involved really feels. That difference shows – to a funder deciding whether to renew, and to an independent examiner forming a view of how the charity is run. It also feeds directly into the trustees’ annual report, which has to show how each fund was used.
The other half of the job
Everything above is about income – what arrived and what it was for. Spending against those funds is the other half, and it needs the same discipline applied to expenditure: costs coded to the fund they belong to as they are incurred, and a shared salary split across funds recorded at the time rather than estimated afterwards.
The two halves meet at the fund balance, which is the number that tells you whether a restricted fund has been overspent. A restricted fund cannot go negative without something having gone wrong, and a charity that only looks at fund balances once a year finds out about it far too late to fix quietly. Where that has happened, the guide to restricted and unrestricted funds sets out what to do next.
Decisions about how funds are handled; what gets designated, whether to approach a funder about varying a restriction, how much subsidy the charity can afford – are trustee decisions in the proper sense, and need the reasoning recorded to the standard set out in how trustees should make decisions that hold up.
If most of your income is restricted, the tracking is not really the problem.
Charities that cannot cover their own running costs are usually not badly organised. They have an income mix where almost everything is tied to somebody else’s purpose, and no plan for changing it. A free clarity call is a straightforward way to look at what your income is made of and what would have to change.
