What it means
A non-profit does not have owners or shareholders, so its balance sheet shows net assets in place of equity. Net assets are simply total assets minus total liabilities, and they are split by whether donors have attached conditions.
Money with no conditions is unrestricted, while money that must be used for a specific purpose or kept permanently is restricted. Unrestricted net assets are the most flexible resource the organisation has.
They pay for salaries, rent, fundraising and any programme that has no dedicated donor, and they build the reserves that protect the charity in a bad year. Funders and rating bodies therefore look closely at this figure, and a steady rise or fall over several years tells them a good deal about how the organisation is managed.
The board can also choose to set some of the money aside, for example for a future building or a reserve fund. These board-designated amounts remain unrestricted in the accounts because the board can reverse the decision.
A donor restriction, by contrast, can only be lifted by meeting its terms or with the donor's consent. A common analysis is to compare unrestricted net assets with the organisation's monthly spending to see how many months it could operate without new income.
Many boards set a target such as three to six months, and they review it each year when they approve the budget. Part of the figure may be tied up in buildings or equipment, so the cash that is genuinely available is usually smaller than the headline number.
Accounting standards in some countries now describe these amounts as net assets without donor restrictions, which is the same idea under a plainer name. The key point for a non-finance reader is that a large total net asset figure can look healthy while most of it is committed to restricted purposes.
In practice
Real-world examples.
Example
A food bank receives a $200,000 donation with no conditions attached. It records the gift as an increase in unrestricted net assets and uses part of it to repair a delivery van and cover payroll during a slow fundraising month.
Example
A university foundation holds $40,000,000 in total net assets, but most is endowment that donors have restricted to scholarships. Its unrestricted net assets are only $4,000,000, so its board treats a deficit in the operating budget as a serious warning sign.
Example
A hospital charity's board votes to set aside $500,000 of unrestricted money for a new wing. The amount is shown as board-designated within unrestricted net assets, and the board can release it for other uses if its priorities change.
Formula
Calculation
Unrestricted net assets = total net assets - net assets with donor restrictions
Total net assets = total assets - total liabilities
Suppose a charity has total assets of $5,000,000 and total liabilities of $1,200,000, so net assets are 5,000,000 - 1,200,000 = $3,800,000. Of this, $1,400,000 is restricted to specific projects and $900,000 is an endowment that must be kept permanently, giving 1,400,000 + 900,000 = $2,300,000 of donor restrictions. Unrestricted net assets = 3,800,000 - 2,300,000 = $1,500,000. With annual spending of $3,000,000, monthly spending is $250,000, so the reserve covers 1,500,000 / 250,000 = 6 months.Case study
Seen in the real world.
Greenfield Youth Trust is an illustrative, fictional charity running after-school clubs. Its accounts showed net assets of $2,000,000, which impressed a prospective funder until the finance manager explained the breakdown.
Of the total, $1,300,000 was restricted to specific clubs and $400,000 was permanent endowment, leaving unrestricted net assets of $300,000. Monthly spending was $150,000, so the trust had only two months of freely usable reserves.
The illustrative lesson is that the headline net asset figure says little on its own. The funder agreed to a grant that was explicitly unrestricted so the trust could build its reserves.
Watch out
Common mistakes.
- Treating total net assets as money the board can spend freely, when much of it may be restricted by donors.
- Assuming that unrestricted means cash, when part of the balance may be invested in buildings, equipment or other assets that cannot easily be spent.
- Confusing board-designated funds with donor-restricted funds, when the board can reverse its own designation but cannot ignore a donor's condition. Tracking the difference carefully protects the charity from spending money it is not allowed to use.
Questions
People also ask.
Can unrestricted net assets be negative?
Yes, if cumulative losses and obligations exceed the freely usable resources, which is a signal that the organisation is under financial strain and may need to cut costs or raise unrestricted gifts.
How do restricted funds become unrestricted?
When the purpose is met or the time period ends, the amount is released and reclassified into unrestricted net assets.
Why do donors care about this number?
It shows whether the organisation has a financial cushion, and whether new gifts will go to the mission or only to filling a gap.
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