Endowments are a critical source of financial stability for nonprofits, providing a reliable stream of income to support their mission-driven activities over the long term. One common question nonprofits face is: "How much should my annual endowment disbursements be?" Finding the right balance between spending to support current operations and preserving the endowment for future needs requires careful consideration and planning.
Understanding Endowment Disbursements:
Endowment disbursements refer to the funds withdrawn from an organization's endowment each year to support its activities. The goal is to strike a balance between providing necessary financial support and preserving the endowment's principal to ensure sustainability over time.
Factors to Consider:
Spending Policy: Nonprofits typically adhere to a spending policy that dictates how much of the endowment's value can be withdrawn annually. The policy often considers factors such as the organization's financial needs, investment returns, inflation, and the desired preservation of the endowment's purchasing power. The standard suggestion for annual disbursements is 3-5% annually.
Long-Term Sustainability: It's essential to prioritize the long-term sustainability of the endowment. Withdrawing too much in disbursements can deplete the endowment over time, jeopardizing the organization's ability to fulfill its mission in the future. Conversely, withdrawing too little may result in underutilization of resources.
Market Conditions: Economic conditions and investment performance play a significant role in determining the appropriate level of endowment disbursements. In times of economic downturn or market volatility, nonprofits may need to adjust their disbursement rates to ensure the endowment's stability.
Endowment Disbursement Advice:
Establish a Sustainable Spending Policy: Work with the Infinite Giving financial advisors to establish a spending policy that aligns with your organization's financial goals and risk tolerance. Consider factors such as inflation, investment returns, and anticipated future needs when determining the annual disbursement rate.
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.
Prioritize Growth: Consider delaying withdrawals from the endowment for a certain period, such as three years, to allow the principal to grow. This strategy can enhance the endowment's long-term sustainability and increase the resources available for future use.
Regular Review and Adjustment: Regularly review your endowment spending policy and investment strategy to ensure they remain aligned with your organization's goals and financial circumstances. Be prepared to adjust your disbursement rates as needed to adapt to changing market conditions or organizational needs.
Communicate Transparently: Communicate your endowment spending policy and rationale to key stakeholders, including board members, donors, and staff. Transparency builds trust and understanding regarding how endowment funds are utilized to support the organization's mission.
Conclusion:
Determining the appropriate level of annual endowment disbursements requires careful consideration of various factors, including financial needs, investment performance, and long-term sustainability. By establishing a sustainable spending policy, prioritizing growth, and regularly reviewing and adjusting your approach, nonprofits can effectively utilize their endowment funds to support their mission over the long term.
Remember, the goal is not just to spend for today but to ensure that the organization can continue to make a positive impact for years to come.