When an organization’s cash outgrows its spending needs, it may be time to invest. This guide highlights 4 types of investment accounts that help nonprofits put their money to work for their missions.
4 Types of Investment Accounts to Consider Establishing
The first step is to determine the proper account structure for the accumulated assets so that they match the organization’s needs and objectives.
By establishing separate accounts to support each area of need, the distinct purpose, objective, and liquidity requirements can be clearly established and the assets in each account managed accordingly.
- Operating Reserves Account
Liquid funds that are readily available to cover emergency spending requirements
A reserve fund is also known as a “rainy day fund.” Operating reserves should be unrestricted funds. Rather than expected to cover a long-term or permanent income shortfall, these reserves are meant to provide a cushion against unexpected events (like a pandemic), losses of income/grants, fundraising shortfalls, or large unbudgeted expenses. The appropriate operating reserve balance depends on a variety of factors including stability of revenue and expenses, the maturity of the organization, and its future plans. A rule of thumb is that the reserve fund should have a minimum of 3 months of an organization’s annual operating expenses1 while some experts advise 6 months or more. Consider developing a “Reserves Policy” that outlines the purpose and use of operating reserves.
- Board-Restricted Fund Account
Funds that provide income that meets target spending and long-term objectives
Most nonprofits are focused on funding their obvious and urgent current needs, but for organizations that have a well-funded Operating Reserves Account, a Board-Restricted Fund Account may make sense.
Many organizations that have a single fund to support their ongoing missions may be operating with this kind of account. Any donations made without donor restriction or intended purpose can support this account. The board has discretion over the use of the assets and should have appropriate spending policies in place.
- Donor-Restricted Endowment Account
Funds with donor-imposed restrictions that provide income to meet target spending
To donors (particularly those contributing through bequests and planned giving), endowments signal that the organization manages its resources well, plans efficiently, and will likely survive any crisis. Endowments offer donors the option of giving a gift that keeps on giving well into the future. Nonprofit donors, especially those gifting more significant sums, often direct their giving to specific purposes in which case the donations must be held in a Donor-Restricted Endowment Account. These accounts require special accounting practices (including tracking funds designated Permanently Restricted or Temporarily Restricted) so knowledgeable internal or external resources are necessary to ensure that the account is administered properly. The board should consider engaging an attorney to ensure that the endowment complies with state requirements, establish the appropriate spending policy, and outline when the endowment principal can be tapped.
- Capital Fund Account
Funds that meet specific needs by an expected date
There are other kinds of reserve funds that can be established to build up cash balances for specific purposes. Surplus funds could be directed to a capital fund, though often these funds come from a capital campaign to raise a specific dollar amount within a defined period of time for a new building, a major new investment, or seed funding for a new project. These are generally temporary accounts to be spent on the specified capital-related need.
How to Begin Establishing Your Nonprofit’s Investment Accounts
After determining the appropriate account structure for your organization’s assets, the next steps include:
- Create an Oversight Group
Structure a group responsible for the oversight of the accounts.
Investment Committee Best Practices
- Create Policies for Each Account
Establish appropriate policies for each account including Investment Policy and Spending Policy Statements.
Elements of an Effective Investment Policy Statement
5 Topics Your Investment Spending Policy Should Cover
- Find Experienced Investment Expertise
Consider hiring a professional investment advisor to help design the right investment program that meets the specific objectives for each account.
Get the Most From Your Nonprofit Investment Advisor: How to Select an Investment Advisor for Your Nonprofit Organization
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eCIO partners with nonprofits of all types and sizes to establish and manage low-cost investment programs customized for their organizations. Whether you are establishing a new program, getting a second opinion on your current program, or just have an investment-related question, eCIO is here for you. Contact us at firstname.lastname@example.org or call (608) 291-4646 to talk to a nonprofit investment advisor today!
- The Nonprofit Operating Reserves Initiative