Should NFPs consider an endowment to help them with future operational support?
It can often be difficult for a nonprofit to maintain a steady income, especially in challenging times. This can make it hard for the board to make spending decisions or maintain a balanced budget. When a rainy day turns into a veritable monsoon, the business may feel that it must run on a shoestring simply to meet its daily obligations and administrative costs. And it’s true that most organisations have recently endured more than their fair share of rainy days.
Move beyond social impact
If your nonprofit is left in this situation, struggling to get a foothold and meet its overall goals, you may be looking for a solution. Could this come in the form of an endowment to provide for future operational support when needed?
Many nonprofit organisations quite rightly focus on their social impact goals. However, this concentration level may often come at the expense of their business objectives, and they may suffer to maintain a positive cash flow. Certainly, that cash flow may have significant peaks and troughs, so the objective should be to flatten those curves and make smart decisions when there is excess cash in the account. Furthermore, fundraising in advance for rainy days may open doors to potential new funders or increased contributions from existing donors. Endowing some of your organization’s key salaried positions is an approach that some have taken successfully, as well.
Outline your goals
With this cash surplus, your organisation could start a stand-alone fund with a goal-based investment approach instead. And with this new strategy, the first step might be to outline your nonprofit financial goals. For example:
Use some annual distributions from an investment pool
When a level of investment reaches a certain threshold, distribute a slice of that money towards budgetary funding, if allowed under state law. The key is to do this consistently so you can rely on those distributions to help with operational costs.
Set a liquidity target
Aim for an acceptable liquidity ratio: the current assets divided by current liabilities. It’s good to have a target of two to one. Anything higher implies that your assets are not earning their keep, but anything lower suggests that the business may not be growing and worthy of a donor’s attention.
Grow a net asset base
If your business owns any long-term assets, aim to protect them and add new ones where possible. Property may be the gold standard here, but remember to offset any associated liabilities to create a more substantial net asset base.
Develop multiple revenue streams
This may be a challenge for many nonprofits, especially if they do not want to take their eye off the mission. Yet whenever possible, it’s a good idea to create additional revenue streams without pillaging existing sources.
Focus on donor retention
It can be tough to acquire new donors and often much easier to retain an existing one. Where necessary, increase the value proposition and engage your donors. Show them that you are taking steps to secure the future of the NFP by creating this strategy.
Develop your strategies
Still, it can often be challenging to build reserves through fundraising alone. Donors often focus on your headline activities and may prefer to give their money to a specific initiative instead. So, they may not be too interested in funding your efforts if you think you tell them you are using it to build a reserve.
The key here may be thinking outside of the box.
Investigate potential collaboration
For example, you might even turn to competitor organisations to investigate opportunities for collaboration. This idea may help to increase exposure, boost public recognition and drive donations.
Start matching gift programs
Think about promoting a matching gift program by growing a database of companies interested in matching donations from one of their employees. Potential donors can then see if their employer is part of such a program and may be more willing to contribute. This strategy can have an exponential effect as new potential donors become aware of the program and ask their employers to enrol.
Trigger corporate sponsorships
In the same vein, consider contacting new companies to develop corporate sponsorships. You can match your nonprofit with businesses that appear to have a similar mission or may share your organisation’s drive and passion. Again, be clear about what your nonprofit offers and why such an association could be mutually beneficial. Set a quarterly target to identify and communicate with prospects.
Manage your growth
As you develop your initiatives, you can segment them from a taxation point of view. For example, any program-related initiatives are typically exempt from tax, while solutions that may be commercial in nature may attract tax under the “unrelated business income” category.
Endowment funding can supercharge any operational reserve that your NFP may have. And remember that any income from investments is restricted for general use and can therefore provide a valuable income stream for the future.
Support to help NFPs grow
If you need some advice about creating a new endowment to help you with future operational support, talk to the experts at HLB. We are a global network of independent advice and accounting firms and have a history of helping our clients innovate, collaborate and grow in difficult times. To learn more about HLB’s global services and capabilities, contact us today and talk to one of our NFP experts.
Related content
