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What are some limitations of restricted revenue?

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Many cultural organizations receive contributions that their donors stipulate must be spent in a specific way, or over a particular timeframe. Restricted revenue often pays for mission-critical programs and services. When pledged as a multi-year commitment, restricted grant can be a source of long-term, reliable revenue.     

However, organizations that rely heavily on restricted funding often lack the flexibility to direct their resources where they may be needed most. They can find themselves with a lot of cash in the bank but no money to pay utility bills or the salaries of their staff. They may discover that the programs or projects their grantmakers prefer to support are not those that most closely align with their strategy.

These problems are exacerbated when restricted money only pays for the direct costs associated with a particular program or project. To cover indirect costs, or overhead, that are often essential to a program or project’s success, cultural managers may need to divert resources from other parts of their organization, undermining its financial health.

Managing restricted money can also be challenging and costly. To segregate and track restricted funds in compliance with grant requirements and accounting standards, organizations may need to invest in additional financial staff and systems.

Management Tips: If your organization relies primarily on restricted revenue:
  • Consider engaging your supporters in honest conversation about what it really costs in direct and overhead costs to start and run your programs and projects.
  • Develop a persuasive case for unrestricted operating support and test it with your most loyal grantmakers and donors.
Be willing to turn down or re-negotiate restricted gifts that take your organization in an unwanted direction.



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