An endowment fund is a cash reserve set aside by a nonprofit organization as a permanent investment reserve. The money in an endowment fund isn't for normal operations of the organization or even an emergency. The funds in the endowment stay in a bank account and accrue interest and earn dividends paid to the foundation and used in daily operation funds.
Talk to Board Members
Before you make any decisions about whether to create an endowment fund, you must consult the board of directors of the nonprofit. When arguing for the creation of an endowment fund, explain that building a sizable endowment can bring money to the foundation as it earns interest in dividends, helping to close the gap in finances in case of a dip in donations or an emergency. Keep in mind that any funds used to build an endowment fund must come to the foundation specifically for the purpose of building an endowment.
Consider Your Options
When you talk to the board, a member may ask why put into an untouchable account money that the nonprofit could use to do good in the community today. Before your organization invests in an endowment, consider that an endowment fund may not be a good idea for every nonprofit. Over time, money can decrease in value due to inflation, so that $1 million that you invest today may not be worth as much in 50 years. Consider if your organization is willing to reinvest some of the interest earned from the endowment back into the fund to keep it from losing value over time. Also question how much money the organization can put into an endowment. If your nonprofit can only afford a small amount, the return earned on the funds may not be enough to make it worth keeping the money in an endowment fund.
The fundraising done on behalf of an endowment fund is similar to what a nonprofit would do to raise money for community projects and operating costs. The foundation can have fundraising events, such as auctions or dinners, or simply ask regular donors outright to donate to the endowment fund. When asking donors for money for the fund, make sure that the foundation is clear about what the endowment is, what it will be used for and what benefits the foundation and community should reap from it. Also consider the need for an expert on planned giving. Some donors may give money to endowment funds as part of an estate or as a real estate holding.
No matter the size of your foundation, if your nonprofit decides to build an endowment fund, someone on your staff has to be in charge of it and responsible for reporting to the board and endowment fund donors. This person should oversee the investment and management of the fund, whether the nonprofit invests the funds on its own or hires an investment firm. When a nonprofit hires an investment firm to invest the money on its behalf, you'll still have financial considerations such as administrative fees, minimum investment amount requirements and the possibility of controlled distribution amounts from the fund.
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