An endowment is, by definition, a permanent investment reserve, meaning that the principal cannot be used unless the donor gives you permission or the endowment is legally dissolved.
Sometimes boards mistake endowments for 1) a cash reserve, which is money tucked away in an interest-bearing account somewhere and is easily accessible; or 2) a “quasi-endowment,” the principal (or corpus) of which is invested for income from earnings but can easily be accessed when the organization need funds.
So, should your organization build an endowment? If your goal is to create a “financial bedrock” for your organization, a cash reserve “in perpetuity” with interest income, then the answer is likely yes. Your minimum goal should be 2x your annual operating budget, but you don’t have to stop there. The corpus is sacrosanct, the “prize” is the earning of interest annually, which can be reinvested in good years and accessed when needed.
Having an endowment can be an attractive prospect for those donors who believe in nonprofit organizations having that financial security that endowments provide. If you are reluctant to take endowment funds from donors when you need “present” funding, you can still build an endowment by dedicating matured bequests and other planned gifts as they come in.
Consider this: a bequest or other planned gift will be the last gift from that donor; an endowment will ensure that the gift continues to fund the organization in perpetuity. And as the Silents and the Boomers age, planned gifts could become more attractive to them than current gifts.
The other consideration, of course, is the management of your endowment funds for maximum return. Some organizations have staff dedicated to the task and others hire professional managers and consultants to manage endowment funds. If neither of those options appeals to you, another idea is to place responsibility in the hands of a community foundation through an endowed fund that will support your organization in perpetuity. The one thing you need to know about this option is that, once the funds have been put in the community foundation, they become an asset of theirs. You receive the interest earned minus a small fee for management.
The one sure thing is that establishment of an endowment is a big step for most nonprofits, and should be carefully considered from all angles by both senior staff and the members of your board.