The case for abolishing restricted income

For as long as I’ve been a trustee I’ve disliked the distinction between restricted and unrestricted income.  

The rationale for it (I think) is that funders like having a legally enforceable way of designating how their money is spent and that this certainty makes it easier for charities to raise money. 

There are four reasons why this system is problematic:

1. Complexity: the distinction between restricted and unrestricted income adds a layer of complexity to charity accounts which makes them harder to understand.  This  makes it harder for trustees to make good decisions - particularly for trustees with public or private sector backgrounds.  My hunch is that many charities get into financial trouble because their trustees fail to recognise the liabilities accrued by restricted income.     
2. Cost: not only are there additional accounting costs from having a separate charity framework, but internally more time is spent slicing and dicing numbers in ways that trustees can understand and interrogate. 
3. Unnatural behaviours: the need for unrestricted funding can force charities to find ingenious ways of crowbarring their ongoing costs into bids for restricted funding and many funders tacitly accept it.  This undermines precisely the given rationale for restricted income as well as muddying the numbers generally.  More strategically, the current funding system can drive charities to bid and deliver endless small projects rather than focusing on the big issues they have been set up to tackle.
4. Unhealthy relationships: the whole concept of restricted income assumes and encourages a dynamic of distrust.  The premise is that funders cannot trust charities to spend the money appropriately unless it is restricted and legally enforced.  This infantilises charities and is not a recipe for healthy collaboration between charities and funders. 

So what should replace it?  

Nothing.  I see no reason why charities in this respect should be any different from public or private sector organisations.

Good funders don’t need restrictive contracts to know whether their money has been spent effectively.  Indeed many are already moving towards predominantly unrestricted funding.  And good charities can make their case for funding without the legal backstop of keeping it restricted. 

So rather than continuing to tolerate this system or find ways to work around it, let’s abolish it and enjoy the extra money and headache-free time we would have.