The growing importance of endowments

PJ’s Ret Boney talked to fundraising consultant Kathryn Miree about why, particularly given the events of the past few years, an endowment is important for nonprofits of all sizes and types. Miree is principal consultant for Kathryn W. Miree & Associates, a consultancy based in Birmingham, Ala.

Question: Why is it important for nonprofits to build and maintain and endowment?

Answer: There are several reasons to start an endowment. The first is to have a source of funds to bridge the gap during cyclical variances in income. That way, an organization won’t have to cut programs and staff during difficult times.

And if you’ve identified new programs and services you’d like to launch, but don’t have the resources you need to start them, an endowment can provide you with the resources you need until you’re up and running.

For some organizations, it might be a resource pool for times of emergency – like a flood or a tornado – whether those emergencies have affected the people the nonprofit serves or the nonprofit itself.

And for other organizations, an endowment might serve as a resource pool for innovation and planning, allowing a nonprofit to evolve to meet the changing needs of the people it serves

And, of course, an endowment can help ensure long-term continuity and sustainability.

Q: Have endowments become more important in the wake of the recession?

A: It’s not that they’re more important, it’s that the recession has brought the role of the endowment into sharper focus.

And having an endowment does not mean the organization is set to weather every downturn.  Because of the difficult environment, some groups have simply run through their endowments.

They’ve been using the endowment to cover operating expenses, often taking far more than the normal distribution of 4.5 percent to 5 percent.

That happened in part because those organizations didn’t have good controls in place and didn’t quite understand that the role of an endowment is not to substitute for operating income.

You can’t just simply pull half your operating budget out of your endowment and still have an endowment over the long-term.

Q: How do you decide if a nonprofit is ready for an endowment, and if it is, how large the endowment should be?

A: I usually look at the organization’s cash flow, the regularity of that cash flow and the 10-year history of its income to see if the organization is growing.

And I look to see if there’s already a fully-stocked operating reserve in place.

One of the exercises I lead a nonprofit through to set a goal is to divide the endowment into the four or five basic areas the organization serves.

Then we brainstorm within each area about what is needed to sustain the organization and take it to the next level.

I’ve never believed in using budget or expense-based formulas to set an endowment goal. That type of approach can shut down fundraising because the desire for the endowment is based on numbers, not on community needs.

An endowment must be based on the value it can bring to the nonprofit, with a secondary goal of providing a safety net.

Above all, an endowment should not, and won’t, replace an organization’s operating budget so that it never have has to fundraise again.

Setting goals based on what you aspire to be is much more compelling for donors because they can envision the impact of their endowment gift.

Otherwise, an endowment just looks like a big pile of unused money.

Q: Is it important for smaller nonprofits to have an endowment?

A: Rather than look at the size of an organization, I distinguish between new and old organizations and perpetual versus short-term purpose.

If you’re brand new, it’s unlikely anyone will provide you with endowment funds because the jury is still out on whether you’ll survive.

What I’m looking for in an organization of any size is its history.

Has it started and grown by adding programs and by responding to new needs? Has it been able to navigate the playing field successfully?

Those things show me the organization is responsible and responding to the needs in the community and is able to morph as the environment changes.

Does the organization have the ability to last long term? If so, then that history is the best case the nonprofit can present to donors.

But if you’ve burned the wick on the candle and the money is gone while the need is still there, I wouldn’t see you as a good investment.

Does the organization have a sustainable source of funding that is growing? By that I don’t mean grant income. Rather, is it able to go to the public to raise money and is it retaining and adding new donors?

If the answer is yes, I know the organization will be able to expand its fundraising to major and deferred gifts.

Q: What are the basic steps a nonprofit should follow in planning for and creating an endowment?

A: There are five basic steps:

  • Make the case for an endowment. Not only about why your organization needs it, but about why donors should invest in the future of your organization and its mission.
  • Develop the necessary infrastructure, which includes endowment policies, solid fiscal-management practices, gift-acceptance policies and good donor-management practices.
  • Assemble a team that can go out and talk to donors about the endowment. The team should include staff, board members and volunteers.
  • Market the endowment campaign. Position it as critical, publish the case for the endowment on your website and in your annual report, report on it every year, and set the expectation that supporters invest.
  • Create a plan and goals. Then work the plan.

There are so many organizations that never have thought about endowments before.

But now, with demand increasing at the same time sources of funding are disappearing, it’s time for another look.

There are organizations out there without any operating reserves or endowments and they’re waiting on miracles. An endowment is not a luxury, it’s a necessity.

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