What is an endowment and how does it differ from a reserve? How important is it to have donors with shared values on board?
An endowment is an established fund of cash, securities, or other assets to provide income for maintenance of a non-profit organisation. The use of the fund may be permanently restricted, temporarily restricted, or unrestricted. Endowment funds generally are established by donor restricted gifts to provide a permanent endowment, which is to provide a permanent source of income.
The reserve is the term used for the balance of unspent funds, or the financial surplus, that can be invested or used by the organisation to fund its future expenditure. Building a reserve is possible when an organisation takes a very specific approach to financial management and organisation sustainability. It should ask specific questions around reserve building: when will the need be deemed to call on the reserve and how will money be used? What decision making approach will the Board take? What programmes or activities can the organisation generate income from to build up the reserve?
Q: HOW DOES AN ENDOWMENT WORK?
A: Of more importance to long term sustainability is the creation of an endowment out of the reserve. An endowment is a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment. Endowment funds are generally more substantial than reserve funds and can be built up over time. This takes a great deal of discipline and financial planning as it is always tempting to use reserve funds whenever there is a dip in donor support.
ing endowment funds from donors is very difficult, although occasionally an individual may leave funds as a bequest to an organisation or a long-standing donor may make such a contribution if they see the value of an organisation’s work over the long term.
Building an endowment can be linked to income generation through services, where some of the fees are invested in the endowment; careful management of donor money that is paid up-front for projects, thereby generating some interest; as well as specific donations for endowment purposes.
Some donors still fail to understand the benefit of supporting strong organisations that have some form of endowment as they do not see the “urgency” of funding. This is naïve and short-term thinking, which brings about the importance of having donors on board who share similar interests and goals as yourself.
Author: Alex O’Donoghue: Development Co-ordinator, Inyathelo: The South Africa Institute for Advancement