ENDOWMENTS:
As charities and nonprofits experience fundraising uncertainty, endowments provide comfort in an uncertain world.

When I first became actively involved with nonprofits, I had a naïve understanding about how charitable organizations and nonprofits actually operate. I thought, like many people, the term "nonprofit" meant that a charity was required to spend every available dollar on the charitable services it provided. That may, in fact, describe how some smaller nonprofits operate, but I have learned it is far from ideal and sometimes insures that a nonprofit will have a short life in today's uncertain world.

Coming from a business background, I understand the importance of generating revenues, budgeting, controlling expenses, cash flows and reserves. It is apparent to me now that well-managed nonprofits have many similarities to well-managed businesses. However, one of the major differences is that a large portion of the revenues which sustain the operations of a nonprofit are not "earned" but are donations from generous individuals, foundations and corporations. Although the nonprofit may also receive income for services provided to constituents, most could not fulfill their charitable missions without those ongoing donations. The uncertainty inherent in the nonprofit business model demands good (sometimes heroic) management and leadership.

Individuals provide almost 75% of all charitable gifts in the United States. In the past several years one world-wide crisis after another has attracted enormous financial support from Americans to charities assisting in relief efforts, often to the detriment of charities with different, though not less important, missions. As people shift their charitable giving dollars to relief organizations, nonprofits not involved in relief efforts may suffer a decline in donations leading to a funding crisis. When those important donations don't materialize, charities may have to curtail or dramatically limit the services they provide.

Funding uncertainty may also arise when a charity depends on government reimbursements for the services it provides. When those reimbursements are slow or reduced, the organization will experience serious cash flow problems affecting the delivery of services to its constituents. What's a charity to do? Government resources for most charitable services have dried up and donations from the business community cannot make up the shortfall.

Most nonprofit organizations are now embracing a strategy which larger national nonprofits have used for many years: building a sustaining endowment. Endowments are often established with estate (planned) gifts from donors, or a charity might decide to have an endowment campaign (similar to a capital campaign) for the purpose of creating or building endowment. Endowment funds are held and invested to produce investment income, which helps sustain the critical operations of the nonprofit. A portion of the investment income earned on the endowment fund is used to support programs and services while the remainder is reinvested to preserve the actual purchasing power of the endowment.

Healthy endowments long have been the "secret weapon" of major universities and other established nonprofits, allowing them to create and maintain outstanding programs. After the past few years of wildly fluctuating annual donations, smaller charities are beginning to understand the value of having a source of revenue which will help smooth out fluctuations in cash flows. An endowment provides a safety net. It insures that a nonprofit will be able to continue providing important services even when individual donations decline. It can also provide the ability to expand or begin new programs as needed.

Some would argue that all monies available to the charity should be used for constituent services….helping those who need help. Fulfilling the mission of a charity is important, but in today's world of increasing uncertainty, insuring that those services can continue uninterrupted is no less important.