Aid Restricted Funds: NGO Boards Facing Cash Crisis

A funding crisis often begins with a number on a bank statement. The NGO may have six months of payroll coming due, a major donor has delayed its next instalment and the finance report shows a sizeable cash balance. The instinctive question is whether that money can keep the organisation alive.

Sometimes it can. Sometimes spending it would breach the grant, the purpose for which the money was given or the organisation's duties as a charity or public benefit body. The important lesson for a board is that cash in the bank and cash available for general use are not the same thing.

Restricted money has a purpose attached to it

Restricted funds are resources that can be used only for a specified purpose. The restriction may come from the grant agreement, a donor appeal, a trust or another legally binding condition. Under the Charity Commission's reserves guidance in England and Wales, restricted funds fall outside the definition of reserves because they are not freely available for general purposes. Charity SORP 2026 also continues the accounting distinction between restricted and unrestricted funds.

The concept is useful well beyond UK charity accounting because it captures a practical reality found in many NGO grants. Money given for nutrition services in one district is not automatically available to pay head-office rent. A grant for refugee legal aid does not become general payroll money because another donor withdraws.

The board should therefore begin a funding-crisis meeting by asking what legal or contractual restriction attaches to each significant cash balance. The name of the bank account is not decisive. Several grants may sit in one account, while one grant may be spread across several accounts. The restriction follows the funds and the agreement, not the bank's label.

Unrestricted funds are not always free cash either

Unrestricted income gives the board wider discretion, but it still does not mean every shilling, franc or dollar can safely be spent. Some unrestricted funds may be designated by the board for a future purpose. Some may be represented by fixed assets rather than cash. Some may already be committed to payroll, taxes, rent or suppliers.

The Charity Commission's reserves guidance makes this distinction clearly. Reserves are the portion of unrestricted funds freely available for general purposes, excluding items such as fixed assets used in the charity's work and certain designated commitments. This is why a balance sheet showing healthy unrestricted net assets can still sit beside a serious cash problem.

For an NGO board, the practical figure is not "total funds." It is the cash that is both legally usable and genuinely available after near-term obligations are recognised.

Receivables can create false comfort

A donor receivable is not the same as money received. If an agreement says the NGO is entitled to reimbursement after submitting an accepted report, the receivable may be a legitimate asset. But in a funding crisis the board must also ask when it will be paid, whether the donor has disputed any costs, whether conditions remain outstanding and whether the donor itself has frozen disbursement.

A cash-flow forecast that treats every receivable as if it will arrive on its due date can hide insolvency risk. The board should distinguish between confirmed incoming cash, reasonably collectible receivables and amounts that are uncertain or disputed. That is not pessimism. It is basic financial stewardship.

The grant agreement decides whether project cash can meet staff exit costs

The hardest decisions often concern salaries, notice pay and severance. Staff may have spent years delivering the donor's project, so it can feel obvious that remaining grant money should cover the cost of ending their employment. The agreement may say otherwise.

The UK Cabinet Office Model Grant Funding Agreement illustrates the problem. It allows certain unspent money to be returned after termination and expressly states that the authority will not be liable for costs related to termination or transfer of employees engaged in the funded activities. Other donors may permit reasonable close-out and staff costs, but only if they were approved, incurred within a specified period or included in the budget.

The NGO therefore needs two separate answers. First, what does employment law require the employer to pay? Secondly, which of those costs may lawfully be charged to the grant? A donor's refusal to reimburse severance does not make the statutory or contractual employment liability disappear. It only determines which pool of money must carry it.

Restricted funds should not be borrowed casually from one project to save another

When unrestricted cash is low, organisations sometimes "temporarily borrow" from a restricted grant with the intention of replacing the money when another instalment arrives. That can be risky even where the board expects a quick repayment. The temporary use may itself be outside the grant purpose, distort donor reporting or expose the organisation to clawback.

If the organisation believes a restricted balance could lawfully be re-purposed, the correct route is to check the governing instrument and seek donor consent or other lawful authority where available. The decision should be documented. A crisis does not automatically dissolve the restriction.

This is also where donor communication matters. Some funders may agree to a budget revision, no-cost extension, reallocation of underspend or use of funds for approved close-out costs. Those solutions are safer than quietly treating restricted cash as an internal overdraft.

The board needs a usable-cash map, not only management accounts

A useful crisis document is a one-page map that reconciles bank cash to actual decision-making capacity. It should show the total cash balance, the portion restricted by grant or purpose, any unrestricted cash that is already committed, expected receivables and the immediate liabilities that will fall due before new income is realistically expected.

This is not another accounting statement. It is a governance tool. It forces the board to see that a large bank balance can coexist with almost no free cash, or that an apparently weak balance sheet may contain receivables that will soon restore liquidity.

Kenya's Public Benefits Organizations Act provides a useful governance example. It requires transparent use of financial resources and makes review and approval of the organisation's assets, liabilities, income and expenditure a responsibility that the governing body may not delegate. Uganda's NGO Act similarly requires accounting records of income, expenditure, assets and liabilities and reporting on funds received and their sources. These rules reinforce the idea that financial distress is a board issue, not merely a finance-department issue.

Restricted funds can also carry future obligations

A restricted grant balance may look like money available for its project, but the project may already owe vendors, subgrantees or staff. The correct fund position therefore requires both sides of the ledger. If a project has $100,000 in cash and $85,000 of valid unpaid commitments, the board does not have $100,000 of flexibility.

This becomes especially important after a donor freeze. Some commitments may remain eligible; others may be disallowed because they were made after a stop-work notice. The NGO should freeze new commitments until the legal position is clear, while identifying obligations that cannot be cancelled without cost.

A funding crisis becomes an insolvency question before the bank account reaches zero

Boards often wait too long because the organisation still has money. Insolvency risk can arise earlier if the NGO cannot meet debts as they fall due or if its liabilities exceed available assets under the applicable legal test. The exact test depends on the entity type and country, but the governance principle is common: directors or trustees should act early while options remain.

The Charity Commission's 2026 sector risk assessment reported increased casework involving insolvency and financial difficulty and again encouraged trustees to identify early warning indicators. That advice is practical for NGOs anywhere. Once unrestricted cash is almost exhausted, the organisation may have fewer lawful choices and less negotiating power with landlords, staff, donors and suppliers.

Emergency spending should be a recorded board decision

Where the board decides to use unrestricted reserves, release a designated fund, negotiate with a donor or begin restructuring, the minutes should show the financial information considered and the reasons for the decision. If a designated fund was created only by an internal board decision, the board may be able to redesignate it, depending on the organisation's governing rules. That is different from overriding an external legal restriction.

The board should also record assumptions about receivables, termination costs and the timing of new funding. A later auditor, regulator or creditor should be able to understand why the decision looked reasonable when it was made.

The most dangerous number in a funding crisis is often the total bank balance because it looks certain. The better number is usable cash: money that the NGO is legally permitted to spend, that is actually liquid, and that is not already required for unavoidable obligations. Boards that know that number early can negotiate, restructure or close programmes in an orderly way. Boards that confuse restricted project funds with spare cash may solve this month's payroll only by creating next month's legal problem.

Source note. This article draws on the Charity Commission guidance on charity reserves and financial difficulty; Charity SORP 2026; the UK Cabinet Office Model Grant Funding Agreement published in December 2025; the Charity Commission's Charity Sector Risk Assessment 2026; Kenya's Public Benefits Organizations Act as amended in 2025; and Uganda's Non-Governmental Organisations Act 2016. The accounting language is used as a practical framework and local law and individual grant terms remain decisive.

Suggested citation: 

Ronald Serwanga, “Aid Restricted Funds: NGO Boards Facing Cash Crisis” East Africa Legal Insight (4 September 2026).