Are restricted funds hiding the real picture?

Here it is with semantic HTML, using paragraphs and an unordered list for the trustee checklist:

A charity can look financially healthy while having very little room to move.

The accounts may show strong income. Several projects may be fully funded. Trustees may see a reassuring bank balance. Yet the organisation may still struggle to cover leadership, finance, HR, IT, fundraising or the unexpected costs that sit between funded projects.

The reason is often restriction.

Restricted funding must be used for the purpose agreed with the funder. That is right and necessary. But if most of a charity’s income is restricted, the headline figures may not show how little flexible money is available to run the wider organisation.

This can create a gap between financial appearance and operational reality.

A charity may have funding to employ project staff but not enough management capacity to support them. It may be able to deliver sessions but struggle to fund monitoring, communications or system improvements. A new opportunity may fit the mission, but the organisation cannot act because every available pound is already committed.

The issue is not restricted funding itself. Restricted grants and contracts can sustain valuable work and provide much-needed certainty. The risk arises when leaders and trustees do not clearly distinguish between income that supports specific activity and income the charity can use more flexibly.

One warning sign is a growing programme of funded work alongside increasing pressure on central capacity.

Each project may contribute something towards overheads, but not enough to reflect the real support it needs. The organisation grows busier, while the CEO, finance team and managers absorb more responsibility without equivalent resources.

Another warning sign is repeated use of reserves to cover core gaps. Reserves may be used appropriately to support planned investment or manage a temporary shortfall. But if they are routinely filling the space between restricted income and the true cost of running the charity, the underlying model may need attention.

Cash balances can also be misleading. A charity may have substantial money in the bank, but much of it may already be committed to future project delivery. Looking only at the total balance can create false confidence.

Trustees therefore need more than an income figure and a bank balance. They need to understand:

• How much income is restricted and unrestricted
• Which central costs are fully funded
• Which services are being subsidised
• How long flexible reserves would last
• Whether new funding creates additional unfunded pressure

This is not about treating every restriction as a problem. It is about understanding what the restrictions mean for decision-making.

Fundraising also has an important role. If the charity repeatedly asks only for visible frontline costs, it may reinforce the imbalance. Funders need a clear explanation of the management, systems, evaluation and infrastructure required to deliver work safely and effectively.

That does not mean every funder will cover every cost. It does mean the charity should know the true position and make deliberate choices about what it is willing to subsidise.

A healthier funding mix usually includes several elements: restricted project income, properly costed contributions to central support, and enough unrestricted income to give the organisation room to lead, adapt and invest.

Unrestricted income may come from donations, regular giving, legacies, trading, membership, events, unrestricted grants or other sources appropriate to the charity. The right mix will vary. The important point is that flexible income should be planned, not treated as whatever remains after project fundraising.

A practical starting point is to divide the next financial report into three views:

1. Restricted income and its commitments
2. Unrestricted income and central costs
3. The level of subsidy being provided across services

This can reveal where the charity is financially strong and where it only appears strong because restricted funds dominate the headline.

It can also improve strategic decisions. Leaders can see whether the organisation is ready to expand, whether a new project is genuinely affordable, and what level of unrestricted fundraising is needed.

At 9 Mountains, we help charities look across finance, fundraising, service delivery and strategy so leaders can see the full financial picture. Strong income is valuable, but real resilience comes from understanding how much freedom the charity has to make good decisions.