If you’re like the executive leaders at most nonprofits, the state of your organization’s finances is a matter of ongoing concern. Whether you rely solely on fundraising to fuel your nonprofit’s mission or manage a number of revenue streams, achieving financial stability is undoubtedly a top priority.
Establishing a nonprofit endowment can be a powerful way to enhance your organization’s long-term financial security. An endowment can help you weather the ups and downs of external market forces while also attracting top-tier donors to your cause.
Even so, creating an endowment is far from a “no-brainer.” It’s important to weigh all the factors before deciding to take this monumental step — and then lay a firm foundation upon which to build. Here’s how.
1. Understand What Endowments Are and How They Function
An endowment is a sum of money — often made up of donated funds or property — that is invested over time and used to generate income. Like annual gifts, endowments can be unrestricted or restricted. Unlike annual gifts, which are typically spent in the year they’re received, the principal of an endowed gift remains intact for a predetermined time period. Only the investment income is used to fund the donor’s intent or the nonprofit’s need.
There are three types of endowment:
- Permanent or “true” endowment. A true endowment is intended to last in perpetuity, and its use is designated by the donor. When most people think of an endowment, this is the idea that comes to mind.
- Quasi-endowed/board-designated endowment. This type of endowment is most commonly set aside by the nonprofit’s board of directors and invested for a period of time. The principal can be drawn on or entirely depleted at the board’s discretion.
- Term endowment. Some donors choose to give an endowment for a set period of time. The principal is invested to support a desired purpose for a specified number of years or until the donor’s death. After the term ends, the nonprofit may liquidate the endowment and release the funds for other purposes.
Some nonprofits — especially community foundations — also offer field of interest funds. This allows donors to direct their endowment support to a broad area of interest or social need.
2. Weigh the Benefits of Establishing an Endowment at Your Nonprofit
Nonprofit endowments are unique because they focus on an organization’s present and its future. However, it can take years — even decades — to grow an endowment that will generate enough income to make a noticeable budgetary impact.
Because of that, creating an endowment shouldn’t be a priority for every nonprofit. You should invest your attention elsewhere if your nonprofit’s mission won’t be relevant in ten, twenty, or even fifty years.
For nonprofits who are able to take the long view, endowments offer a number of attractive benefits. They:
- Generate an ongoing source of income that can become the foundation for the organization’s operating budget
- Create stability that counteracts the ups and downs in annual giving and other sources of revenue
- Enhance an organization’s prestige and instill trust with its community and potential donors
- Appeal to donors who want to leave a legacy through a planned gift or see the impact of their major gift support grow over time
- Help organizations build a natural pipeline for major giving since most donor-funded endowments require a minimum gift threshold
If you want to position your nonprofit to achieve higher levels of impact over time, creating and growing an endowment is a smart way to do just that.
3. Put People and Systems in Place to Support Your Endowment-Building Efforts
Despite their many benefits, endowments also add a layer of complexity that must be taken into account. Putting the right endowment-related infrastructure in place before you begin fundraising is critical to your long-term success.
Assess Your Organizational Readiness
First, gauge your organization’s readiness to support an endowment. Ask questions like:
- Do we have buy-in and support from the right stakeholders? Does the board endorse an endowment-building initiative? Are internal team members in finance, development, and operations prepared to work together to make this vision a reality?
- How will we manage our endowment? Will we make investment decisions in-house? Create a fund through a local community foundation? Hire a financial advisor or investment management firm?
- Do we have the right systems in place to track gifts to the endowment? Is our fundraising CRM robust and able to support activity devoted to endowment building? Does it integrate with finance so we can provide accurate and detailed endowment reports to donors and the board?
- Where will endowment support come from? Have we identified and cultivated donors who are excited to help get this endeavor off the ground? Are fundraisers equipped to handle endowment-related gift conversations?
An external perspective can be very valuable here. A consulting firm with expertise in endowment building can help you honestly assess where your organization stands. And if you identify gaps that stop you in your tracks, an external partner can put an action plan in place to fill them.
Recruit/Appoint an Endowment Steering Committee and Put Them to Work
Next, it’s time to put leaders in place who will spearhead and champion your endowment-building efforts. Often, this committee functions as a sub-committee of the board in order to elevate its importance and ensure ongoing attention and commitment.
Effective steering committees will include the following people:
- Your development director or other key fundraiser
- A representative from finance
- Board members and/or other influential volunteers
- One or two donors who are passionate about endowment building
- External advisors such as a financial planner, CPA, or estate lawyer (especially if you don’t have this expertise in-house)
Once you have your steering committee in place, they should help you:
- Create endowment-related policies and procedures (e.g., investment guidelines, minimum gift thresholds, etc.)
- Draft a compelling case for support that articulates the “why” and “how” of supporting the endowment
- Set aspirational yet realistic fundraising goals and rally the team around these targets
- Help your fundraising team identify, cultivate, and solicit endowment donors
- Participate in meaningful stewardship activities that demonstrate gratitude to donors and keep them engaged
Again, it can be helpful to engage a partner to work with you in putting the right people and processes in place. An expert consultant like Benefactor Group can help you establish clear roles and responsibilities for your volunteers and employees. We can also take you through a series of in-depth workshops to equip you to grow your newly established endowment over time.
Once Established, it’s Time to Grow Your Endowment
Creating an endowment is a lot like planting a tree. Just as it takes years for a small acorn to grow into a mighty oak, it can also take time to reap the benefits of an endowment. However, it’s possible to accelerate a tree’s growth by planting the seed in good soil — and the same is also true for an endowment.
Establishing your endowment in good soil will require you to sharpen your understanding of how endowments work, assess your organization’s readiness, and put the right people and processes in place to drive your vision forward. Only then can you nurture your fledgling endowment and see it grow to its full potential.
When you’re ready to establish and grow an endowment at your nonprofit, don’t hesitate to get in touch. We’d love to help.