Nonprofit Financial Management: Sustainability in a Volatile Market

Posted by Matthew Thomas

Even small nonprofits often have endowment funds invested to sustain long-term work toward the cause for which they were founded. Large nonprofits typically have a significant source of their annual revenue generated by earnings off of investments. So when the market begins to jump around, as it has done since the middle of the summer, nonprofit leaders begin to get nervous about what downward market trends might do to their revenues. This induces some to pull their funds from the markets, or hesitate putting funds into the markets. 

matthew-thomas-2Downward markets trends tend to cause no small amount of panic. However, sound financial management suggests that there are four things we can do intentionally, and four others we can avoid, that will strengthen our organizations' financial health, and ride out downturns in the markets.

  • Do: Follow your Investment Policy Statement (IPS), even in a market downturn. An IPS specifies the investment objectives, who is responsible for achieving those objectives (and who is responsible for monitoring), asset allocation, diversification, rebalancing, and so forth. Rebalancing should typically take place on a regular, predetermined basis, rather than at the whim of the managers. 
  • Don't: Try to time the market. In the moment, it's never clear where the market bottom is, or its top. In the long term, markets show trends; in the short term, they're a little (a lot?) crazy. If people could predict where the market was going to go in the short term, a lot of people would be making a lot of money. Most people want to sell during a downturn and buy as the wave rides higher. The problem is, that for most people, this means buying high and selling low, which is just the opposite of what would create a strong return. The best option is to buy and sell on a regular basis, according to the IPS, as the budget dictates, taking advantage of the lows to buy more shares, and taking advantage of the highs to gain more appreciation. 
  • Do: Maintain a cash reserve large enough to sustain your organization through a short-term dip in the market, to prevent having to sell securities low, if at all possible. Once the markets rebound, replace the cash reserve.
  • Don't: Focus too much investment in one type of security, or one sector of the market. Diversify. Chasing hot stocks does not typically work for funds that expect to remain in perpetuity. 
  • Do: Allocate assets based on risk tolerance and goals. Can your organization handle the risks associated with the potential rewards of investing? Remember, too, that inflation is a risk - and that securities that offer returns below the rate of inflation are actually losing buying power. 
  • Don't: Rebalance based on short-term swings in the market. Set a time window, and asset allocation variance window, and stick to it.
  • Do: Make sure your organization maintains compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in a down market. UPMIFA requires that the long-term purchasing power of a fund be maintained, not just its historical dollar value. Prudence (the P in UPMIFA) requires sound judgment in a market downturn. The law requires a seven-point test for prudence. (Ohio's version is here, which matches UPMIFA Section 4(a), applicable in all states (and DC, and USVI) with the exception of Pennsylvania.) We have helped organizations implement UPMIFA. We'd be glad to help. 
  • Don't: Panic. Take a deep breath. This, too, shall pass.

These do's and don't's will help sustain your organization's financial health in a market downturn. Taking a step back from the day-to-day headlines, looking at the long-term trends, and focusing on your organization's mission will help get you through the days when the market seems crazy. We're in this with you!

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This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Design Group International and its associated consultants are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security.

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Topics: nonprofit management, Matthew Thomas, financial management, Financial Health,, UPMIFA

Surplus and Sacrifice: the Organizational Development Impact

Posted by Matthew Thomas

In times of economic growth, donor-based organizations can appeal to people’s sense of wealth and surplus: “Hey, you have a little bit extra this year, why not give it to [fill in the blank].” In surplus times, we can ask for someone’s extra and may get away with it.

Quarter or Dollar? Surplus or Sacrifice?In times of economic pressure – or even in times of long-term stability or stagnation – donor-based organizations must dust off another term: sacrifice. We ask people to give up something that they have that is good (maybe even necessary) for our cause, in order to gain something often much less tangible.

These two approaches create different relationships with donors and place different levels of responsibility on the organization. In the first instance, people’s passion and involvement can be relatively low – they had a little extra, we asked for a little extra, and that’s what we get. In the second instance, we are asking donors to become more deeply involved in our cause. Moreover, we are saddling ourselves with a greater responsibility to use those funds wisely and prudently – since someone gave up something beyond their “extra” to promote our purpose. We realize then that we are in something of a partnership with our donors and that it matters how we handle what they have given us. This has the potential to change our organization’s financial priorities – to make sure we do what we do with quality, and on purpose.

How does the difference between surplus giving and sacrifice giving affect your organization’s sense of responsibility, financial priorities, and relationships with your donors?

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Topics: Matthew Thomas, Design Group International, nonprofit financial management, nonprofit management, resource development

A Fund Usage Policy: Developing Board Clarity for Restricted Funds

Posted by Matthew Thomas

A few weeks ago, I wrote about gaining clarity in non-profit restricted funds. Reader feedback has inspired me to write a little more on the subject to help bring clarity to funds whose restrictions are often vague.

Many nonprofits (particularly churches) have funds that are collected for a designated purpose that is so broad that it is hard to allocate the funds. Often, this is because the collection of these funds is laden with assumptions about their use. In addition, when the funds are received, the only controlling document is a event program / bulletin or the verbal expression of purpose of the fund. In most cases, this is the most clarity the fund holds.

implement clarityConflict then erupts when the use of the funds is applied. Organizations with funds like these operate on precedent – since there is no resolution or solid designation from the donors, they can do little else without effort. Nevertheless, precedent is squishy and memories differ in the first place.

In this case, the best option for organizations with such funds is to create a solid fund usage policy and a process for reviewing requests for disbursements and distributing funds. The process needs to be financially accountable, using normal levels of internal controls common to healthy organizations: no one person controls the transaction from start to finish, decision-makers are confined to those without conflict of interest, standards of review and approval exist and are followed, no one writes checks to cash (or themselves), and so on. Most importantly for the process, the Fund Usage Policy creates the framework in which the process operates.

The Fund Usage Policy basically answers the questions known to beginning essay-writers everywhere: who, what, where, when, why, how (and in this case, how much). For example:

  • Why does the fund exist? Why does the fund need a policy to govern it? Why is there a need for the fund / what need inspired a person or persons to set the fund up in the first place?
  • What are the organization’s goals for the use of the fund? What does the organization intend to accomplish with the fund? What written donor-based restrictions exist? What verbal donor-based restrictions exist? What review process exists (or can be created) to measure whether the goals are being met in practice?
  • Who is eligible to request funds? Who is eligible to receive funds? Who reviews the requests? To whom is the requester / recipient / reviewer accountable? Who sets the policy or may change the policy for the use of the fund? Who are the fund’s donors? Who are the fund’s recipients / beneficiaries?
  • Where are the funds held? Where will future contributions be collected or received? From where will disbursements be issued? Where is the fund’s information kept? Where do those requesting funds go to make their request?
  • When did the fund originate? Is there any passage of time that could cause the fund’s restrictions to expire? When does the fund make disbursements? When does the fund accept requests? In what time frame does the fund respond to requests? In what time frame is the fund’s activity reviewed?
  • How much may be requested in any one request from the fund? How much is the average request? How will requests be made? How will review take place? How will accountability be maintained? How will disbursements be made? How will contributions be received? How will the fund’s assets be managed?

If your organization can build consensus around those questions, you will be able to use your restricted funds with clarity and integrity. This will break through the unspoken and unwritten assumptions and help your organization speak clearly to how it uses its funds.

Design Group International Consultants are available to assist your organization in finding clarity on fund usage and implementing accountable solutions so that your organization can accomplish its purpose. Contact Senior Consultant Matthew M. Thomas at 1.877.771.3330 x20 or at for assistance on fund clarity. You can also follow him on twitter @mattthomasdgi for updates on Sustainable Vision.

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Topics: Matthew Thomas, Design Group International, nonprofit financial management, restricted funds, policy, board development, board policy, board governance, internal controls, nonprofit management