It`s a dream come true
After years of planning and managing a well-crafted fundraising campaign, your nonprofit lands a game-changing, million-dollar, unrestricted gift. Or maybe it’s an accumulation of smaller donations that develops into a pool of cash many times greater than the nonprofit’s annual budget. While you’d think such an opportunity would launch a flurry of activity to deploy those funds, we’ve found many organizations are left flat-footed, uncertain where to start with nonprofit investing. The cash ends up stalled in a checking account at the nonprofit’s bank for a year or more, while leadership and the board grapple with what to do first. The solution is to create a strong nonprofit investment plan that matches the organization’s most pressing strategic goals with the most appropriate investment objective in order to boost impact.
Step One: Prioritize Strategic Goals
To deploy a large unrestricted gift, the organization should first prioritize which strategic goal, among those below, most need funds.
1. Emergencies and Large Unexpected Expenses
While we always wish for the nonprofit to operate without failure, we know that’s impossible. For example, a large grant that was counted on for years is suddenly terminated. A key staff person leaves and the search for a replacement requires unanticipated recruiting costs. Without sufficient funds to address these challenges, it could spiral into further pain for the organization.
A pot of cash set aside that is easily accessible can give an organization peace of mind should these unexpected events take a major hit to the organization’s budget. If a nonprofit has yet to set aside reserves for emergencies, this must be achieved before any other investments are considered. For more information on how much to set aside in emergency reserves, refer to our article How Much in Reserves Should a Nonprofit Have?
2. Income Smoothing
A nonprofit may need occasional cash to manage fluctuations in the timing of donations or grants to effectively pay for fixed monthly expenses, such as rent and salaries. This income smoothing may be needed regularly or be used periodically to help the organization operate without long periods of scarcity.
3. Major Purchases
A growing and thriving nonprofit at some point will require equipment upgrades or new facilities. This often needs pre-planning months or years in advance, as does the saving or fundraising for this purchase. The funds allocated for the major purchase need to be set aside in an account that will not be touched for other purposes.
4. Growth and Perpetual Support
Funds set aside for a specific, long-term goal, like the expansion of a program or for perpetual support, also need to be ring-fenced safely to ensure its protection for a longer time horizon. This often requires a more comprehensive investment strategy, deploying a range of investments.
Step Two: Understand Investment Objectives
Nonprofit investing requires that the organization map its prioritized strategic goal to an investment objective. There are four basic investment objectives.
Liquidity is the ease at which an asset can be converted to cash. The more liquid an investment, the easier it is to be converted to cash and therefore, quickly pay for needed goods and services. Savings accounts, money market accounts and short-term Treasury securities are examples of very liquid investments. Illiquid assets are those that cannot be quickly converted to cash. Examples include real estate and collectibles.
Investment income is money collected on top of an original investment. Many investment assets generate income, but investment income is mostly associated with savings accounts, CDs, money market funds, and bonds.
Growth or Capital Appreciation
Capital appreciation is a rise in the price of an investment over time. It is also the difference between the purchase price of an investment and the selling price of that same investment. Investments typically designed for capital appreciation are stocks, real estate, and commodities.
Step Three: Establish Time Horizon
Time horizon is the time interval from when nonprofit funds are invested to when the funds are used for their intended purpose. While professionals vary on their definitions of short-, medium- and long-term time horizons, we think of nonprofit funds used within two years to be short-term, medium-term considered between 2 years and 10 years and long-term for a period of over ten years.
The importance of time horizon in nonprofit investing is that it determines whether a) your investment is returned to you or b) you receive a return on your investment. With short-term investments you should expect to receive the money you invested back. Longer-term investments are expected to grow but are often more volatile—they experience significant changes in price—and need time to achieve positive returns.
Step Four: Match Nonprofit Strategic Goals with the Appropriate Investment Objective and Time Horizon
Once a nonprofit has determined its primary strategic goal associated with its large cash balance and understands the various investment objectives available to them, nonprofit leadership including the board should match the strategic goal to the investment objective and time horizon, preferably with help from an investment or financial professional. Below are some examples of that matching process.
Choosing the right investment objective for a large unrestricted philanthropic gift or cash balance does take some deliberation, planning and continuous management from nonprofit leaders and the board. But when the work is accomplished, you’re a robust nonprofit investing process can help your organization emerge stronger and resilient, providing more impact to the communities you serve.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!