When a not-for-profit organization thrives, it earns more through donations, grants, and gifts than it needs to operate. The money left over can go to paying any long-term debts the organization may have accrued, but it can also be invested to help the organization continue to grow and offer more services and programs.
But with regulatory hurdles, quick turnarounds, and a lack of guidance, it can be hard to come up with a comprehensive investment policy on your own. Here are five steps to get started.
1. Take Responsibility
Whether you ultimately decide to hold the investment funds yourself or outsource the task of managing the money to an independent firm, remember that the board of directors remains solely responsible for the organization’s investments and investment options. Once the initial policy is created, it serves as a roadmap for future members of the board and stakeholders, which means the first few decisions the board makes have lasting power.
Because the board is responsible for investment funds, it should check the status of these accounts regularly. As a best practice, review investments at least once per quarter. This helps the non-profit make decisions based on up-to-date information about how their investments are — or aren’t — growing.
2. Set Diversity
Perhaps the most well-known tool for reducing the risk of investing is by investing funds in several different types of accounts — a diversified portfolio. Since your not-for-profit investment is no exception to being risk-averse, decide on a portfolio makeup that meets the needs and goals of your organization. For example, 30% in stocks, 30% in mutual funds, 20% in a money market account, and 20% in bonds.
Include these amounts in your policy, so when future investments are made, they follow the same percentages.
As you consider the makeup of your investment portfolio, also consider the liquidity — how easily accessible the money is — of your investments. Will you need to take money out at a moment’s notice, or can you afford to leave it alone for several years? This affects what types of investments will be most helpful to your organization.
3. Create Buy/Sell Guidelines
As with any investment, there will be times of growth and times of loss. If your investments start to sink, what strategy best suits your organization’s needs? Do you buy during a bear market, or do you reallocate funds to better weather the storm? How often will you evaluate and make changes to your investment portfolio and/or strategy? Your specific policy will depend on how and when you plan to use investment funds for your organization.
4. Establish Approval Process
Hoping that all goes well and your investments grow steadily, decide how your not-for-profit organization will use investment growth to serve its mission. An approval process for taking funds out of investments should include how often withdrawals are allowed, who is responsible for approving the withdrawal, and how much can be taken out at any given time. Will you allow a certain dollar amount, or would it make more sense to use percentages? Will investment profits be used across all programs and services, or only a few?
Not all of these policy questions and considerations hold for a specific type of not-for-profit investments: endowments. The goal of an endowment is to continually make money the organization can use for programs or operations. Its goal is to always maintain positive gains on the initial amount, and to never dip below that amount. (Doing so results in what’s known as an “underwater” endowment.)
Endowments established by a third-party organization, such as a private foundation, may come with their own policy that your not-for-profit will have to follow. However, even if the endowment does have a policy in place from the outset, your board of directors will not only need to familiarize themselves with it, but consider adding additional policies as needed by the organization. If there’s nothing in place when the endowment is established, the board will need to create the endowment policy on their own.
When considering what types of policies to enforce on your not-for-profit endowment, it may be best to make its policies less risk-tolerant than other types of investments. Depending on the goals and needs of your organization, you probably want to maintain the balance and ensure it always grows, even if it does so slowly.
To help maintain your endowment, limit withdrawals from it to a specific percentage, and only allow them when the endowment is above its initial value. You may want to consider enabling a strict approval process as well, depending on the use of endowment funds and who has access to them.
Investment Guidance From CPAs
Investments and endowments are powerful financial tools for not-for-profit organizations when they are used correctly. Having a robust, detailed policy for how and when to use your investments will help protect them from unnecessary distributions and market fluctuations. If you have any questions about setting up a non-profit investment policy, don’t hesitate to contact us. We’re always here to help!