I recommend to all of my clients that they set up an endowment fund that will eventually contribute to (or fund entirely) the cost of organizational operations. Here are some thoughts on endowments for your consideration.

Don’t Wait for the Big Gift

I always tell my clients that they should think of endowments as organizational retirement plans. While it would be nice to get one big gift in order to fund an endowment, for many small organizations, that’s a bit like hoping to win the lottery.

Instead, your organization should follow the same sound fiscal principles that apply to saving for retirement and try to add some portion of its income each year to their endowment fund. Holding a special fundraising event every year, for example, could provide annual income to the endowment, and also helps to publicize the endowment to potential donors. Another option might be to direct a small percentage (for example, 5%) of all fundraising activities to the endowment fund. There are a lot of ways to approach this; the important thing, I believe, is to have a saving plan and stick to it.

Defining the Purpose

The Board of Directors needs to decide what activities the endowment will fund — general operating? Special programs? They might establish one large general endowment fund, or create multiple smaller funds in order to appeal to different donor interests: for example, separate endowments to fund educational programming, facilities maintenance, etc.

Starting the Endowment

Start the fund first so that it’s available for people to give to, rather than waiting for the gift and then establishing the fund. This allows your organization to accept small gifts and to work with donors to make planned gifts or bequests. This should be part of a comprehensive donor development strategy; if that’s not yet in place, establishing the endowment would be a good way to start working in that direction.

Legal Considerations

The Board will probably want to specify what kind of gifts the organization will accept and how those can be liquidated. (For example, it may not make sense for the organization to accept a gift of real estate.) This also lets the donor know what to expect.
The organization also needs to develop a policy for how money will come out of the endowment fund — for what purpose, who can withdraw it, how often can it be withdrawn, etc. That information probably should become part of the organization’s bylaws.

Financial Management

The money is going to have to be saved somewhere and managed appropriately. The organization should figure out first what level of risk it is comfortable with; it shouldn’t place its money with a financial manager who’s risk-averse if it’s not, and vice versa. The Board will also need to decide how much of the capital gains to reinvest each year or what percentage of the principal can be withdrawn, in order to keep building the fund over time.

Here are a few links that I’ve collected … some of this information is repetitive, but there are some good nuggets in there.

The Non-Profit Assistance Fund

Comerica’s Endowment Building Services and Endowment Management pages.

A book about endowment building from the Association of Fundraising Professionals.

An article that examines whether the organization is ready to have an endowment.

A recent article that I thought was good general information for thinking about development.

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