The Community Foundation for Southeast Michigan hosted an Agency Endowment 101 webinar to define what endowment is, detail how the Foundation invests and administers endowment funds, and illustrate how our staff supports more than 230 agency endowment partners. If you’re interested in watching this webinar, you can view it here.

We were elated to see so many of our community partners join this webinar. During our Q&A, we received many questions about financial health and whether their organization was financially ready to start an endowment fund. We turned to one of our senior accountants, Claire Sorenson Devlin, to follow up on that conversation with some initial guidance to nonprofits considering endowment. Before joining CFSEM, Claire served as the Director of Finance for Habitat for Humanity of Oakland County, giving her a unique perspective on stewarding nonprofit funds for long term goals.  

Please note that we are providing this information as a general frame for internal assessment, and it is not intended as legal, accounting, or financial planning advice. We encourage you to consult professional advisors to best serve your organization’s future. 

Financial Health:  

Here are some questions to consider: 

1. 1. Does your organization have a balanced operating budget?  Do you budget for a cash reserve each year?  
   2. Do you currently maintain cash reserves?  How long would you be able to run operations with no additional revenue expected?  A good rule of thumb is three to six months of your annual operating budget in liquidity to withstand fluctuations in revenue. 
   3. Does your organization have a diverse stream of revenue sources?  
   4. How does your balance sheet look?  
   5. Consider talking to your bank to help determine the strength of your balance sheet 
   6. Liquidity: Organizations should strive for a current ratio (current assets / current liabilities) of 1.0 or higher 
   7. Leverage: Organizations should strive for a leverage ratio (total debt / total assets) of 3.0 or lower.  

Strategic Planning:   

If you have not prepared one already, we encourage you to create a strategic plan to guide the organization into the future that considers your mission, vision and sustainability.   

1. Your strategic plan would outline where the organization will be in three to five years 
2. Do you have a strategic plan that outlines a capital reserve?  A reserve could be used to help establish an endowment. 
3. Does your strategic plan consider the support needed from the board and leadership?  Does your board support and understand the establishment and management of an endowment?  
4. If the organization wants to create an endowment, what specifically is the organization’s strategy for the endowment?  

If the idea of an endowment seems daunting, the organization can consider a stepped approach.  The organization could first strategically budget for building a board-designated fund, which allows for more flexibility.  This board-designated fun could potentially turn into the funding for an endowment.   

Operational Needs: 

The organization will want to consider its operational needs in creating and managing an endowment.  Here are just a few questions related to fundraising and development needs:  

1. Is there market potential for additional fundraising dollars that would not dilute your annual operating needs? 
2. Does your organization have qualified fundraising staff to plan and execute fundraising programs that support the endowment in addition to the annual necessary fundraising goals? 
3. How does an endowment fit into your current development plan? Does your development plan have a policy on how you manage unexpected and unbudgeted large gifts?  How can you incorporate endowment support into your campaigns?  
4. Does the organization have a planned giving program that could support an endowment?  
5. Have you performed a fundraising assessment to compare your organization’s donor metrics to industry best practices?  
6. How do you plan to communicate to your donors, clients and stakeholders on your strategic plan or policy changes to support an endowment?  

Again, please note that we are providing this information as a general frame for internal assessment, and it is not intended as legal, accounting, or financial planning advice. We encourage you to consult professional advisors to best serve your organization’s future. 

 Should general questions arise not addressed in this document or in our recent webinar, please be in touch with us! Contact pservices@cfsem.org.