Investing wisely is crucial for nonprofits to steward their funds well and achieve long-term financial sustainability. When it comes to selecting the appropriate investment account, nonprofits must consider their time horizons, financial objectives, risk tolerance, and regulatory requirements. In this guide, we'll explore the various account types offered by Infinite Giving and help nonprofits determine which account aligns best with their needs.
Note: If you are looking for more specific information beyond the explanations below in regards to our specific portfolio allocations please see: What's in my investment portfolio and ESG Portfolios.
Operating Reserves Account
Purpose: This account is designed to provide nonprofits with short-term financial stability by storing funds for daily operations, emergencies, or unexpected expenses. This is your rainy day or emergency fund and is the first milestone for financial sustainability.
How much: Most nonprofits should hold 6-12 months of operational expenses in their reserve account.
Best for: Cash management in FDIC sweep program or other low risk, high liquidity holdings. These should maintain easy access to funds for operational needs without significant restrictions on withdrawals.
Key Features:
High liquidity with easy access to funds.
Typically low-risk investments to preserve capital.
Flexibility in deposit and withdrawal options.
For further information, please see our Ultimate Guide on Nonprofit Reserve Funds: How to Manage Operating Reserves.
Capital Reserves Account
Purpose: Capital reserves serve as a financial safety net, allowing the nonprofit to ensure the ongoing maintenance and upkeep of assets. Similar to operational reserves, capital reserves are specifically designated for larger-scale maintenance and repair projects, such as HVAC system replacements, roofing repairs, exterior painting, and other major capital expenditures.
Best for: Nonprofits with capital assets seeking to proactively address maintenance needs and prevent the deterioration of their assets over time.
Key Features:
Dedicated funds for major maintenance and repair projects.
Preservation of property value.
Proactive management to avoid sudden financial strain from unexpected repair costs.
Utilization for timely addressing of maintenance issues to minimize disruptions and avoid costly repairs resulting from neglect.
Board Restricted Fund Account
Purpose: Board restricted funds are earmarked for specific projects or purposes as designated by the nonprofit's board of directors.
Best for: Nonprofits with clear project-specific financial goals and a desire to segregate funds for specific purposes as decided by the board.
Key Features:
Funds earmarked for specific projects or initiatives.
Investment strategies aligned with the timeline and objectives of the designated project.
Endowment Account
Purpose: Endowment accounts serve as a vehicle for nonprofits to invest funds with the intention of generating income to support their mission over the long term.
Best for: Nonprofits seeking to build a sustainable source of income to support their ongoing operations and initiatives without the constraints of donor restrictions.
Key Features:
Long-term investment horizon: endowment accounts are designed to be held indefinitely, allowing for a disciplined approach to investing with a focus on maximizing growth and income generation over time.
Flexibility in fund usage: Unlike donor-restricted endowments, endowment funds can be utilized at the discretion of the nonprofit's governing body, providing greater flexibility in addressing evolving organizational needs and priorities.
Emphasis on growth and income generation: While preserving capital is important, endowment accounts typically prioritize investments with the potential for both capital appreciation and income generation, ensuring a sustainable source of funding for the nonprofit's mission.
Diversified investment strategies: To mitigate risk and optimize returns, endowment accounts often employ a diversified investment approach, allocating funds across various asset classes such as equities, fixed income securities, and alternative investments.
Stewardship and oversight: Nonprofits managing endowment funds have a fiduciary responsibility to prudently steward and oversee the investments on behalf of their stakeholders, ensuring alignment with the organization's mission and values while adhering to applicable regulations and best practices.
By including endowment accounts in their investment portfolio, nonprofits can establish a stable and reliable source of income to support their mission over the long term, while retaining the flexibility to adapt to changing circumstances and pursue strategic opportunities as they arise.
For further information, please see our Ultimate Guide on Nonprofit Endowments: The Ultimate Guide to Build Your Fund.
Donor Restricted Endowment Account
Purpose: Donor restricted endowment accounts hold funds donated by external parties with specific restrictions on their use, typically for long-term investment growth.
Best for: Nonprofits receiving donations with explicit restrictions on their use, aimed at generating perpetual income or preserving capital.
Key Features:
Long-term investment horizon to maximize growth and sustainability.
Compliance with donor-imposed restrictions on fund usage.
Emphasis on capital preservation and steady income generation.
Quasi-unrestricted Endowment Account
Purpose: Quasi-unrestricted endowment accounts hold funds that the nonprofit designates for specific purposes but without explicit donor restrictions.
Best for: Nonprofits wishing to set aside funds for long-term goals or future initiatives while maintaining flexibility in their use.
Key Features:
Flexibility in fund usage while preserving capital for future needs.
Investment strategies tailored to the nonprofit's long-term objectives and risk tolerance.
Difference between traditional endowment funds and quasi-unrestricted endowment funds: For endowment funds, the donor states that the gift is to be held permanently as an endowment. For quasi-endowment funds, gifts are elected to be added to the fund, which means a future board could vote to remove part or all of the principal for spending.
Capital Fund Account
Purpose: Capital fund accounts are dedicated to financing major capital expenditures or investments that enhance the nonprofit's infrastructure or capacity.
Best for: Nonprofits planning significant capital projects or investments in assets to support their mission and growth.
Key Features:
Funds earmarked for capital projects or asset acquisitions.
Investment strategies aimed at funding long-term capital needs while balancing risk and return.
Choosing the Right Account
When deciding which account type is most suitable, nonprofits should consider their financial objectives, risk tolerance, and regulatory obligations. It's essential to assess the organization's short-term needs, long-term goals, and any restrictions imposed by donors or governing bodies.
We suggest every nonprofit have an Investment Policy Statement which helps govern the investment matters of the organization. We can help you create one as part of our services. For more information please see: The Importance of a Nonprofit Investment Policy Statement. You can also download a free template here. However, our customized policies go well beyond this example template.
Our services offer customizable solutions tailored to meet the unique needs of nonprofits, providing a seamless investment experience while ensuring compliance and financial sustainability. Nonprofits can leverage our expertise and technology to make informed decisions and optimize their investment strategies for long-term success.