I recently read the following analogy from Jem Stein of Daring Capital, an investor specialising in early-stage social entrepreneurs.
A quick guide to restricted funding:
Charity: We want to buy a table to eat at.
Funder: Great. We love funding tablecloths. They are so pretty and give everyone a nice warm fuzzy feeling.
Charity: That's great. So, the thing is that below a tablecloth is a table. You can't see it but it's essential to eat at.
Funder: Ah, but tables are expensive and boring so we want to fund as many tablecloths as possible as they directly support the end user.
Charity: But without a table the tablecloth will go on the floor.
Funder: Can't you find the money somewhere else?
This captures nicely the broad difficulty with restricted funds: that they are prevented from maintaining the very fabric of the charitable organisation. As such they lack flexibility and can deny charities the chance to use their own judgement and experience over where the charity’s resources can best be deployed to achieve maximum impact.
As a reminder, the distinction between restricted and unrestricted funds comes from both charity law and the Charity SORP.
Unrestricted funds are free to use for any activity within the charity’s purposes.
Designated funds are a part of unrestricted funds that a charity’s trustees can choose to set aside for particular specific purposes. Designated funds remain unrestricted and trustees can undesignate or redesignate these at any time.
Restricted income funds, on the other hand, have legally restricted status and can only be spent by trustees on specific purposes; these criteria being narrower than the charity’s overall purposes. ‘Restricted funds’ is a legal concept and can only arise in the following circumstances:
As well as potentially denying charities the choice of where best to deploy the charity’s resources, and instead directing them towards a narrow element or area of the charity’s objectives, the fundamental practical problem with restricted funds is that they cannot generally be used to support the core costs which are the lifeblood of any organisation, charitable or not.
Core costs typically include areas such as HR and payroll, general office expenses including rent rates, utility costs, IT infrastructure and staff costs, accountancy and audit and other governance and regulatory costs, communications and outreach. All of these are accepted as essential elements of any modern professional organisation, so why are many funders so reluctant to make unrestricted awards?
From a donor’s point of view, if you are satisfied over the impact that the recipient will deliver with your donation then why would you need to impose restrictions on it, except in the cases where the donor itself has specific restrictions on how/where its money can be spent? Are donors actually using restrictions in place of genuinely assessing and measuring impact? If more charities were using the quantitative impact measurement and reporting tools that organisations such as Pro Bono economics advocate, would more donors be prepared to move away from restricted giving?
Children in Need is one of the organisations leading the way in this area. In 2023 it unveiled a new Core Costs funding line, providing up to £40,000 per annum per charity to fund these normal operating costs, becoming one of the first major grant-givers in the UK to acknowledge the fundamental importance of sound administration to the effective functioning of the sector. It remains to be seen whether others will follow its lead.
If you wish to discuss this further, please contact one of our Charities team members here.
