A fund is restricted when the person giving you the money has put a condition on what it can be used for, and you have accepted that condition. The condition usually sits in the grant offer letter, the funding agreement, or an email trail that forms part of the award.

Where the restriction comes from

In practice it comes from one of three places. A funder’s offer letter naming a project, a budget line or a time period. An application you wrote, which the funder approved on the terms you set out. Or a public appeal where you told donors the money was for a specific thing.

That last one catches people. If you run a crowdfunder for a minibus and raise more than the minibus costs, the surplus is still tied to the purpose you advertised unless you said otherwise in the appeal wording.

Common restriction types

• Purpose: the money is for a named project, cohort or activity.
• Budget line: the funder approved a breakdown and expects spend to follow it, often with a tolerance of five or ten per cent between headings.
• Time: the award covers a defined period and unspent money at the end is dealt with under a specific clause.
• Capital: the money buys an asset, and the funder may have a claim if you sell it within a set number of years.

What does not make a fund restricted: your own board deciding to earmark money for something. That is a designation. It comes out of unrestricted funds, your directors can reverse it at any meeting, and it should never be presented to a funder as restricted.

Go and read your three largest funding agreements this week and note which of these four restriction types each one uses.

Unrestricted income is money your directors can spend on any activity that fits the company’s objects. For most CICs we work with in Cardiff and Newport, it comes from a short list.

• Trading income: delivery contracts, room hire, course fees, sales.
• Service contracts from a local authority where you are paid for delivery rather than given a grant.
• Donations with no stated purpose, including collection tins and regular givers who were not told where the money goes.
• Bank interest, unless the funding agreement says interest earned on grant money belongs to the grant.
• Core cost or capacity building grants, where the funder has deliberately said the money is for running the organisation.

Why unrestricted income is worth more than its face value

Restricted money rarely covers the real cost of delivering the work. Insurance, the bookkeeping, the director’s time spent writing reports, the accountancy fee: some funders allow a share of these, many cap it at a low percentage, and a few refuse overheads entirely. The gap comes out of unrestricted funds.

So a CIC that is fully grant funded with no unrestricted income is fragile, even when the bank balance looks healthy. We have sat with CIC directors who had a strong five-figure balance and no money they were actually allowed to spend on the rent.

A note on contracts versus grants

If a council pays you to deliver a defined service and can ask for the money back if you do not deliver, that is usually trading income rather than a restricted grant, and it may have VAT and corporation tax consequences a grant would not. Check how each award is worded before you assume it is a grant.

List your income sources for the current year and mark each one restricted or unrestricted. Anything you cannot classify from the paperwork, ask the funder.

One bank account is fine. Funders almost never require a separate account, and juggling four accounts creates more errors than it prevents. What they do require is that you can show, on demand, how much of each award you have spent and on what.

The set-up we use in Xero

We put each restricted award on a tracking category. Every transaction that belongs to that award gets tagged, including the share of salaries, and anything untagged is unrestricted by default. That one rule removes most of the guesswork, because you can run a report at any point and see tagged spend against the budget you agreed.

Code to the funder’s budget headings, not your own. If the offer letter says staff costs, venue, materials and evaluation, make your chart of accounts or tracking lines mirror those four words. When the spend report form lands, you are copying figures across rather than rebuilding them from bank statements.

Allocating shared costs

Most costs are shared. A project worker split across two grants, the office, the phone. Pick a basis, write it down once, and apply it every month:

• Staff: hours recorded on a timesheet, or a fixed percentage agreed with the funder at the application stage.
• Premises: floor space or sessions used.
• Everything else: a sensible percentage, documented, applied consistently.

Funders rarely argue with a method that is written down and used the same way every month. They do argue with a number that appears at year end with nothing behind it.

Do it monthly

A CIC that tags transactions weekly can produce a quarterly spend report in under an hour. One that leaves twelve months of untagged bank lines spends a fortnight on it and still gets questions back.

If your bookkeeping is already behind, start the tagging from today and rebuild backwards in blocks of one month.

This is the question we get asked most, usually in February when the year end is approaching and there is grant money still sitting in the account.

Read the clause first

Your funding agreement will say one of three things. The money carries forward into the next period, often with written approval. The money is repayable. Or the funder wants to discuss a variation, which is common when a project ran late for a reason outside your control.

Never quietly absorb it into general funds. If a funder later reconciles your accounts against their award and finds money they thought was ringfenced has gone on something else, you have a problem that is far harder to fix than an email asking for a carry forward.

How it shows in the accounts

A CIC files accounts at Companies House like any other company. Unspent restricted money is still your money in the balance sheet, but the useful presentation separates it out so a reader can see what is committed. We usually show the split in the notes and set out fund movements in a schedule the directors can hand straight to a funder.

The other side of this is overspend. If you have spent more on a restricted project than the award covers, the excess has landed on unrestricted funds whether you planned it or not. That is worth knowing before you commit to the next bid at the same price.

Overspend and underspend both need a conversation

Funders deal with these constantly. A six-week delay in recruiting a project worker is a normal thing to report. The relationship damage comes from silence, and from a report that arrives three months late with figures nobody can trace.

Diarise a check of restricted balances two months before your year end, and email any funder with an underspend at that point rather than after.

We write grant reports for more than ten community interest companies in and around Cardiff. The requests vary in wording and barely vary in substance.

The standard quarterly or six-monthly pack

• Spend to date against the approved budget, by heading, with the variance shown.
• A short explanation of any heading more than about ten per cent out.
• A forecast for the rest of the funding period, so the funder can see whether you will spend the award in full.
• Evidence for a sample of costs: invoices, payslips, a bank statement line.
• Confirmation that restricted money has gone only where the agreement said.

What makes a report come back with questions

Round numbers with nothing behind them. A staff cost that does not reconcile to payroll. A figure that contradicts the previous quarter with no explanation. Salary recharges that nobody can tie to a timesheet.

The timing problem nobody warns you about

Grant deadlines rarely line up with your company year end. A funder may want last year’s finalised accounts in March when your accounts are not legally due until much later. That is why we get accounts finished early for CIC clients with live bids, rather than filing at the deadline, because an application that misses a window waits a full round.

Where it helps, we introduce CIC clients to a fundraising consultant who works on the next bid while we deal with the reporting on the current one.

Pull your funder’s reporting template now and check it against what your current records can produce. The gap between those two things is the work.

A lot of the guidance online about restricted funds is written for registered charities, and CIC directors read it and worry about rules that do not apply to them.

The regulatory position

A community interest company is a limited company. You file accounts at Companies House, a CIC34 community interest report alongside them, a confirmation statement, and a corporation tax return with HMRC. You are regulated by the CIC Regulator on the community interest test and the asset lock. There is no Charity Commission oversight and no requirement to follow the charity sector’s accounting framework.

The practical position

Funders do not care about that distinction. They want the same discipline on restricted money from you as from a charity, because their own accountability runs the same way. So the sensible approach for a CIC is to borrow the fund discipline without pretending to be a charity in your filings.

Two things CICs forget

• Grant income can still be taxable. Corporation tax treatment depends on the nature of the payment, and a CIC with a surplus can owe tax even where the money came from a grant. Check this before the year end rather than after.
• The asset lock limits what happens to assets bought with any funds, restricted or not, if the company is wound up or transfers assets out.

If you are weighing up whether a CIC or a charity structure fits what you are building, read our CIC vs charity guide before you commit, because changing structure later is expensive.