By Stewart Darrell, CFA

An endowment is a hallmark of financial longevity and an important component of any nonprofit’s long-term strategy. It allows nonprofit board members, administrators and donors to build a reserve fund to further their organization’s mission and complement sometimes irregular annual gifts and donations. Having the right investment and strategic approach helps ensure the organization is on track in pursuing its stated mission and is adhering to the administrative and fiduciary responsibilities that go along with managing long-term reserves. Here’s a checklist to help you evaluate if the organization you’re involved with has the right financial elements in place:

  1. Does your nonprofit have a strategic plan? Make sure there is a strategic, written plan detailing the organization’s long-term goals and the role of the endowment. Donors typically give to endowments because they want to promote an organization’s sustainability and see the impact of their contributions over an extended period of time. Sharing a strategic plan with current and prospective donors and the community can be a valuable marketing activity.
  2. What are the specific goals for the endowment? Identify financial goals that make sense for the nonprofit, its mission and the nature of the endowment itself. A goal may be to create a protective financial layer against potential annual budget shortfalls, or to establish a sizable pool of assets to sustain the organization into perpetuity. Either way, articulating a clear vision is key to creating a shared understanding and framework for the whole organization to work toward. Start by detailing annual fundraising goals, return expectations, and any restrictions on how the funds are to be used.Nonprofit unified hands
  3. Do board members understand the endowment’s structure and its restrictions? Is the endowment a “quasi” or “true” endowment? Are the assets donor-restricted or board-restricted? To manage the endowment successfully, board members and other leaders need to understand how it’s built, the restrictions on the investment proceeds and the associated rules and regulations that govern it.
  4. Are all of the endowment’s documents in order? When an endowment is created there are generally guiding documents. These typically include an investment policy statement (IPS) that governs how assets will be invested, a withdrawal policy that establishes how much of the fund can be taken out each period, and a spending policy that explains how investment proceeds can be used. These documents should be well maintained and reviewed regularly.
  5. Is the investment strategy well thought out? The financial core of an endowment is typically built around an investment portfolio with targeted goals and investment guidelines. The portfolio needs to be managed with a written IPS and a focused investment strategy. These two components should be specific enough to provide adequate guidance and include enough flexibility to adapt to market declines and/or unexpected events. The investment strategy should be evaluated regularly and adjusted as needed.
  6. Is the board evaluating performance appropriately? Remember, with endowments, you’re investing for the long term, and as such, it’s best practice to review performance over the mid to long term. The IPS should have clear monitoring and rebalancing policies to help your organization evaluate performance and guide the decision-making process. Keep in mind that no decision or investment should be viewed in isolation. Instead, consider each in the context of the entire portfolio and the broader investment strategy.
  7. Is cash management on point? Having a steady cash flow and cash management approach is critical for any organization. Strive for a solid financial base by having appropriate levels of cash on hand to hedge against uncertainty and provide enough cushion when you need it. See our blog Cash-Enhancing Strategies for Your Nonprofit for more on this topic.
  8. Do you have the right team in place? No effort can be successful without the right people behind it. This is especially important for an organization’s investment committee which is key to building and maintaining financial strength. It’s essential to have a group with a diverse set of experiences and perspectives along with a shared understanding of fiduciary best practices. Many nonprofits choose to deepen their leadership bench with professional investment expertise by bringing in a financial advisor. An advisor can help with the oversight of the endowment, facilitate investment policy guidelines and provide administrative support.

We know that building and maintaining an endowment is a big job and we hope you found this checklist helpful. Connect with us if you’d like to learn more about our services and how we help organizations get and stay on track.