Editor's Note: The following is an excerpt from NFF's Money & Mission blog at the Chronicle of Philanthropy. It was originally published August 1st, 2011.
As the economy continues its slow recovery, nonprofits and donors are more frequently trying to understand the role of financial reserves—a tool that may have been an option in the past but is now a must-have for organizations that hope to maintain stability in turbulent times.
In particular, people want to know how reserves compare with endowments, because both are ways for nonprofits to help secure the organization’s future.
Reserves are a lot more flexible than endowments—and often more appealing. The money and the interest from a reserve are governed by a nonprofit’s board and can be used for many purposes.
Endowments tend to last a longer time than reserves but are much more restricted. Typically, nonprofits can spend only the interest generated by investing the money in an endowment, and donors can place many restrictions on how the money may be used.
Organizations often spend a good deal of fund-raising energy building up endowments and then find they can tap only a small portion of the pool of money raised. Making matters worse, donors who have recently given to endowments often don’t want to make a second gift for current needs—so nonprofits find themselves in a squeeze to pay for current operations even when they have just completed a successful campaign.
Read the rest at NFF's Money & Mission blog >>>