The rules and common parlance of nonprofit finance are mostly the same as any other business, but nonprofits have some specialized language and practices, including:

Restricted vs. Unrestricted Funds – Dollars raised for nonprofit work generally fall into two categories: restricted and unrestricted. Restricted funds are those from individual, foundation, or government entities that are tied to specific activities, so they can only be spent on those activities. Unrestricted funds, on the other hand, can be used for anything the program needs – from salaries to supplies to rent. Not surprisingly, unrestricted money is often the most desirable type of funding organizations receive because there are fewer obstacles to spending it.

Indirect Costs – Please note that even with restricted funds, a percentage of total indirect costs (that is the money necessary to pay administrative costs like the rent on an office, insurance, fundraising costs, bookkeeper’s salary, office supplies, business fees and so on – sometimes called “overhead”) can usually be charged as a percentage of any grant or contract. There is no set ratio for indirect costs, but the Office of Management and Budget (OMB) offers guidance for percentages paid through government contracts and grant applications will often offer an acceptable percentage. Organizations are also strongly encouraged to ask potential funders what they expect the indirect rate to be if the grant materials do not specify it.

Fringe – The cost of having employees obviously includes their wages and other direct compensation but employees incur other expenses including benefits, payroll taxes and fees associated with things like payroll services. Fringe is normally calculated as a percentage of salary or payroll. This rate ranges depending on a number of variables but the Bureau of Labor Statistics calculated the average fringe rate was 30%. Funders expect that this and your indirect cost rate will be calculated in to any proposals you prepare.