Understanding the different types of charity funds is essential for proper financial management. In this blog, we explain the key differences between restricted, unrestricted, designated, and endowment funds, along with the importance of free reserves.

1. Restricted Funds

Restricted funds come from donations or grants given for a specific purpose. Charities must use these funds in line with the donor’s wishes and cannot allocate them to general running costs.

📌 Example: A £15,000 grant is awarded to fund a mental health programme. That money must support activities related to that programme only.

2. Unrestricted Funds

Unrestricted funds offer the most flexibility, allowing charities to cover day-to-day expenses, new projects, or emergencies. Trustees decide how to allocate these funds based on the charity’s needs.

📌 Example: A charity receives £10,000 in general donations. The trustees allocate it where it’s needed most.

3. Designated Funds

Trustees may set aside a portion of unrestricted funds for a specific purpose, creating designated funds. Unlike restricted funds, these can be reallocated if priorities change.

📌 Example: A charity reserves £50,000 to purchase a community van. If needed, trustees can later use it for another purpose.

4. Endowment Funds

Endowment funds consist of assets or donations meant for long-term investment. The charity usually cannot spend the original capital but may use income generated from investments.

There are two types of endowments:

• Permanent Endowments – The capital remains untouched, and only investment income is spent.
• Expendable Endowments – Trustees have the discretion to spend the capital if necessary.

📌 Example: A donor gifts £100,000 as a permanent endowment. The charity invests it and uses only the interest earned each year.

5. What Are Free Reserves?

Free reserves include unrestricted funds that are not tied to designated funds, endowments, or essential assets (such as buildings or equipment). These reserves provide financial stability and cover unexpected costs.

📌 Example: A charity holds £80,000 in unrestricted funds, but £40,000 is designated for future projects. That means only £40,000 qualifies as free reserves.

Charities must balance free reserves with effective management of restricted, designated, and endowment funds to ensure long-term success

Would you like help reviewing your charity’s fund classifications? Get in touch!