If you are a charity, managing your finances effectively is crucial to fulfilling your objectives and ensuring long-term sustainability. One approach that many not-for-profit organisations use to manage their assets is establishing designated funds. These funds can play a vital role in financial planning for charities, helping to maintain focus on the anticipated future needs and objectives of the charity. Therefore, understanding designated funds for charities is crucial.
What are Designated Funds?
Designated funds are assets set aside by a charity, at the trustees’ discretion, for a specific purpose, such as supporting a program, project, or long-term goal.
Although designated funds usually form part of a charity’s unrestricted funds, they are different in what they reflect. Unrestricted funds can be used by the charity for any purpose to further its charitable objectives. However, designated funds are the element of those unrestricted funds which trustees set aside for predetermined use.
These funds are often earmarked for a range of purposes, such as:
- Program expansion and programme specific funds: Funding new initiatives or scaling existing programs being run by the charity;
- Capital projects: To finance building, renovation, or major infrastructure investments to grow the charity;
- Maintenance fund: For the upkeep of properties, facilities, vehicles and equipment;
- Operational needs such as financial obligation funds: To smoothly set aside resources to meet future loan repayment obligations, including principal payments and interest due in the future;
- Emergency or crisis relief funds: Set aside to help the charity mitigate any identified risks to its central operations;
- Administrative needs: Tailored to the needs of the charity from a HR, training and staff development perspective;
- Awareness campaign funds: To execute an event focused on a specific campaign to increase awareness towards a particular charitable cause;
- Financial stability/sustainability fund: To build a financial cushion for unexpected costs in the operational running of the charity;
- Planned giving fund: Efficient planning of excess unrestricted funds to set aside for future beneficiaries;
- Event specific funds: To allocate resources specifically for organising, managing and executing a particular event, such as an anniversary.
Benefits of Designated Funds
- Financial Stability: By designating funds for specific projects, charities can ensure that they have the necessary resources when needed. This reduces the risk of financial shortfalls to achieve desired outcomes on long and short term plans.
- Increased Donor Confidence: Donors appreciate transparency and knowing that their contributions are being used for a specific cause or purpose. As designated funds can be used to embody a charity’s future plans, this can potentially increase trust and encourage more donations.
- Focused Impact: Designated funds allow charities to remain focused on their strategic goals, ensuring that money is allocated efficiently to areas that align with the mission at any specific point in time.
Best Practices for Managing Designated Funds
- Clear Documentation
It is essential to document the purpose of each designated fund, specifying how and when it is planned to be used. Plans for the future are usually discussed at trustee meetings, and this usually provides the most appropriate forum for formally agreeing to the amounts to be set aside for specific purposes, in conjunction with a regular review of the charity’s reserves policy. You can find more on this here
- Regular Reporting
Charities should provide regular updates on the status of designated funds to stakeholders, ensuring accountability. A breakdown of designated funds must be included in the disclosures to the statutory accounts, often accompanied with narrative to outline the plans for the various designated funds.
- Flexible Reallocation
While funds are designated for specific purposes, it is vital to have a process in place to regularly review and reallocate funds if a project becomes unviable or priorities change. This helps to ensure that designated funds remain relevant and accurately reflect the charity’s plans.
It is also important to note that setting aside these funds does not equate to legally restricting or committing them. Any designated funds can be formally undesignated by trustees and transferred back to general unrestricted funds at any time if there is no longer a need to ringfence them towards a particular cause.
In conclusion, designated funds can be essential to a charity’s financial strategy. They offer a way to set aside resources for critical initiatives, increase donor trust, and provide precise financial planning for the future. By managing these funds effectively, charities can ensure that they are financially resilient in the long term and continue to make a meaningful impact towards achieving their charitable objectives.
If you are a charity or a not-for-profit organisation, have a look at our website to see how we can help you manage your finances.