In the realm of philanthropy, nonprofits of all sizes strive to make a meaningful and lasting impact.
While the primary focus often lies on fundraising and immediate needs, it is crucial for nonprofits, even small ones, to consider the long-term stability and sustainability of their operations. Those immediate needs often get in the way of the planning needed for long-term financial stability.
One effective strategy to achieve this is by establishing an endowment. In this article, we will delve into their significance for nonprofits, discuss the historical difficulties associated with creating and maintaining them, and present five compelling reasons why nonprofits should consider embracing this approach.
The Historical Challenge of Establishing Endowments:
The first form of endowment can be traced back to the Islamic world during the 7th century, and something known as a “Waqf.” In this practice, a person, usually of considerable wealth, would donate a piece of property or other assets for religious or charitable purposes.
The Waqf was intended to be a perpetual donation, with the principal of the donated asset preserved and only the income used for charitable purposes. These Waqf were used to fund a variety of public works, including hospitals, schools, and mosques, serving a fundamental role in the social infrastructure of Islamic societies.
The practice of Waqf continues to this day. But throughout history, as the idea of endowment spread, building and maintaining them has posed several challenges.
Historically, large-scale endowments were mainly associated with prestigious universities, cultural institutions, and well-established charitable organizations. Smaller nonprofits often struggle to gather the necessary resources to create and sustain them due to limited access to funds, a lack of awareness, and a focus on immediate needs.
However, recent trends indicate a growing recognition of the importance of endowments for both small and large charities.
Indeed, the Chronicle of Philanthropy recently highlighted how a large charitable foundation was granting funds to nonprofits to enable operating reserves – in effect their own endowments.. The effect on one nonprofit that was on the brink of financial disaster was immense. Read more about that here.
Five Reasons Why Having an Endowment is a Great Idea:
- Long-Term Stability:
They provide a solid foundation for a nonprofit’s financial security by generating a consistent stream of income. This stability enables nonprofits to continue their mission, regardless of economic fluctuations or changes in donor patterns.
- Financial Independence:
By establishing an endowment, nonprofits can reduce their reliance on external funding sources and diversify their revenue streams. This financial independence empowers them to navigate through challenging times and seize new opportunities without compromising their core values and programs.
- Enhanced Program Flexibility:
A well-funded endowment allows nonprofits to expand their scope, develop new initiatives, and respond to emerging needs in their communities. This flexibility fosters innovation and ensures the organization remains relevant and impactful over the long term.
- Attracting Donor Confidence:
They demonstrate a nonprofit’s commitment to sustainability and responsible financial management. Donors can be more inclined to contribute when they see their gifts making a lasting impact, further solidifying the organization’s financial position. Donors like to see nonprofits take care of their donations and charities that have a long term vision.
- Legacy and Perpetuity:
Nonprofits can leave a lasting legacy by providing perpetual support for their causes. It allows organizations and donors to extend their impact across generations, leaving behind a positive imprint on society.
The Importance of Endowments to Larger Nonprofits:
Endowments play a vital role in the success of larger nonprofits, allowing them to sustain their operations, expand their programs, and make a broader impact. According to the 2019 Giving USA Report, charitable organizations in the United States received $47.9 billion in gifts and bequests to their endowments.
This substantial support allows larger nonprofits to build substantial reserves, fund research initiatives, offer scholarships, and establish long-lasting community programs.
Four Pitfalls to Watch Out For:
- Over Reliance on Endowment Income:
Nonprofits must strike a balance between utilizing endowment income to further their mission and ensuring the long-term growth and sustainability of the fund. Over Reliance on endowment income may lead to the depletion of principal funds and compromise the organization’s future.
- Inadequate Governance and Oversight:
Proper governance and oversight are essential to protect the integrity and purpose of an endowment. Nonprofits would need to establish clear policies, develop investment strategies, and regularly review the fund’s performance to ensure its longevity. But using the Better Giving Sustainability Fund ‘quasi-endowment’ means that governance and oversight is strengthened and taken care of by Better Giving alone. Reducing the admin burden and increasing ease of use.
- Insufficient Donor Engagement:
Nonprofits should actively engage with donors and communicate the impact and importance of their endowments. Neglecting donor stewardship and failing to demonstrate the value of an endowment may lead to decreased contributions and reduced long-term support. Some donors can also be put off from making a donation if they think a nonprofit is too ‘wealthy’ because of their endowment.
Being part of the Better Giving Sustainability Fund means that nonprofits have access to great communications that show how both funding for day-to-day costs AND feeding the fund are important.
- Failure to Adapt:
Nonprofits must adapt to evolving trends and market conditions. Neglecting to reassess investment strategies, staying abreast of changing regulations, and failing to respond to shifting donor priorities can hinder the growth and effectiveness of an endowment. Better Giving take care of all of that.
How can Better Giving help?
Better Giving allows nonprofits to benefit from the Better Giving Sustainability Fund, a quasi-endowment, irrespective of their size or geographical location. It provides the opportunity for nonprofits to secure their future, expand their impact, and leave a lasting legacy. It gives donors an easy route to choose what proportion of their donations go into the current account, or into the Sustainability Fund.
For those wanting to practice zakat, tzedakah or tithing using fiat or crypto, Better Giving enables this cheaply and easily.
So, the Better Giving Sustainability Fund removes some of the potential pitfalls and enables nonprofits to leverage the power of endowments, enhance their effectiveness and concentrate on working towards creating a positive and lasting impact on the communities they serve while not adding to their administrative burden.
Challenges and costs have historically hindered smaller nonprofits from embracing an endowment strategy, the increasing awareness of the importance of endowments and the numerous benefits they offer have opened doors to greater financial stability and sustainability.
Endowments should not be for the few, but for the many. The Better Giving Sustainability fund enables this!
To find out more, register for your own Better Giving nonprofit account that includes access to the Sustainability Fund services. It’s free to do so, there are no upfront or annual subscription charges!