Today’s nonprofits face declines in charitable giving and generally challenging economic times that may have you worrying about your organization’s financial future. If you want to feel more confident in your nonprofit’s ability to outlast these challenges, you need to prioritize building long-term financial sustainability. 

One effective way to do so is to start thinking more strategically about how you manage and where you place your reserve funds. While investing likely isn’t your top priority, it’s an essential part of the proactive cash management practices that will set your organization up for long-term sustainability and financial growth.

In this article, we’ll discuss why you should invest and how to start building up your reserve funds through strategic nonprofit investing.

Nonprofit investing and cash management basics

Before we get into the steps you should take to start investing, make sure you understand the basics. Review the answers to a few frequently asked questions that your team might have about nonprofit investing:

• Can nonprofits invest? Yes! In fact, investing is highly recommended for good financial stewardship. Nonprofits can invest in stocks, treasury bills, CDs and more. Due to lower risk tolerance, nonprofits typically invest in low-risk assets that they can easily liquidate if needed, like treasury bills. 
• What kinds of funding do nonprofits invest? The most commonly invested funds for nonprofits are reserve funds and endowments, but even capital campaign funds and grants should be placed in low-risk sweep accounts. Investing your nonprofit’s cash reserves (also known as your rainy day fund) helps it grow and avoid losing value in savings accounts due to inflation. Endowments, on the other hand, are funds made up of donations that are meant to be invested for long-term growth.
• What does a nonprofit need to start strategically managing its cash reserves? To invest any of its funding, your nonprofit will need a brokerage account, a nonprofit Investment Policy Statement and a qualified partner or provider to work with. This might be an investment advisor or consultant. While it is possible to take a DIY approach and invest directly through a firm like Fidelity or Schwab, that is much more difficult.

You’re bound to have more questions about nonprofit investing as you do further research and start putting your funds to work. The right partner, such as a nonprofit investment advisor, can help you through the specifics and give you a more holistic understanding of investment best practices.

Why should you strategically manage your nonprofit’s funds?

Becoming more financially sustainable is the main goal, but how else can nonprofit investing help you further your organization’s goals? What makes low-risk, highly liquid investments worth the effort? 

According to Infinite Giving, you should strategically invest your nonprofit’s funds for three key reasons:

1. To grow your reserve funds. Your nonprofit cannot be called financially sustainable without sufficient reserves. A healthy reserve fund, which covers at least six to 12 months’ worth of operational expenses, prepares you to manage crises and weather unforeseen circumstances that impact your finances.
2. To attract major donors. Giving a major gift requires a lot of trust in your organization. A positive investing track record can help you convince more prospects to give major gifts by proving that your nonprofit is financially responsible and forward-thinking. 
3. To build up your nonprofit’s assets. Strategic, practical investments can help your nonprofit build capital long-term to better its overall financial position.

Ultimately, investing your funds wisely will improve your organization’s financial health – potentially improving your reputation, donor relationships and ability to achieve your mission in the process.

How to start building sustainability with your investments

Once you’ve discussed the basics and benefits of investing with your team, take the following steps to get started.

1. Work with a nonprofit investment advisor.

First, choose an investing partner or provider to manage your portfolio and provide recommendations. For the most tailored services, partner with an experienced nonprofit investment advisor. 

These professionals have both general financial and nonprofit-specific expertise, giving them a unique understanding of your organization’s investment needs and goals. The right advisor will:

• Recommend portfolios based on your specific goals and policies
• Have a fiduciary responsibility to work in your nonprofit’s best interest
• Provide ongoing oversight of your investments
• Regularly report on your investing performance to board members and other key stakeholders
• Understand nonprofit investing best practices
• Charge lower minimums and fees than traditional brokers

Ideally, your advisor should also provide investment management tools or technology that makes tracking, managing and reporting on your investments easy. Some advisors even provide tools for accepting stock donations from supporters, boosting your fundraising potential.

2. Outline clear goals and policies.

Before your nonprofit can begin investing, your leadership team must finalize an Investment Policy Statement that will govern your nonprofit’s activities. If you have an investment advisor, they should work with you to create this document at no extra charge.

In this document, outline key details like your organization’s investing goals, strategies, risk tolerance and donor restrictions. Your IPS should describe the fiduciary responsibilities of your nonprofit, board members, and investment advisor, along with specific policies relating to asset allocation, diversification and spending.

Additionally, it’s important to clarify how you’ll measure the success of your investment strategies and report on them. For instance, Jitasa explains the importance of recording all investment activities in your statement of cash flows to monitor your organization’s financial health.

All of these policies will help guide your nonprofit’s investing activities and protect your organization by providing guardrails.

3. Invest in low-risk, highly liquid strategies.

With your IPS finalized and your team all on the same page, you can start strategically managing your funds! When it comes to your organization’s reserve funds, most nonprofits prioritize investment strategies with low risk and high liquidity. This means choosing assets with lower potential for losses (and lower returns) that are easy to liquidate when needed.

Investments like short-term CDs, treasury bills and money market accounts typically fall into this category.

Don’t forget to consider the type of account you use to invest your reserve funds, as well. Brokerage accounts with sweep programs (also known as sweep accounts) provide more protection for your funds through additional FDIC coverage. While a typical bank account only insures funding up to $250,000 if the bank fails, some sweep accounts offer up to $5 million in FDIC coverage.

While many of these strategies are available through banks, consider looking for alternative solutions (like a nonprofit investment advisor) that provide more competitive yields and sweeps for reserves.

Nonprofit investing can feel daunting at first, but it’s a key aspect of responsible financial stewardship that will put you on the path toward greater sustainability. With the right partner and a strategic approach, your organization can grow your funding sustainably.