How Big Should Your Capital Campaign’s Endowment Be?
Many nonprofits use capital campaigns to expand operations by designating a portion of funds raised for an endowment. An endowment provides the funding needed to power your nonprofit’s new program long-term.
Of course, every nonprofit has the same question when it comes to starting an endowment: How big should my nonprofit’s endowment be?
We’re here to answer that question!
How Big of an Endowment Should Your Organization Have?
When it comes to endowments, bigger is always better, but that’s not a practical answer for most nonprofits. Instead, the answer will depend on your nonprofit’s capital campaign and long-term goals.
Endowment Considerations
The following factors will impact the size of your capital campaign endowment:
- Endowment type. A real, traditional endowment’s funding and spending are restricted by donors. However, most nonprofits have quasi-endowments. These are reserve funds restricted by your nonprofit’s boards. Unless there’s an emergency, these funds stay in the endowment. But unlike a real endowment, they can be pulled without issue.
- Spending needs. Endowments can be controversial. While bigger endowments can generate more income, your stakeholders—both internal and external—might question whether money sitting in an endowment would be better spent on your mission immediately.
- Fundraising priorities. While endowments do provide revenue, it’s unlikely your nonprofit can create one big enough that you can forgo regular fundraising activities. In fact, endowments can reduce your financial liquidity, meaning it might not always be the best time to invest in your endowment.
Free Download: The State of Capital Campaigns
This groundbreaking research into how capital campaigns are planned and executed by North American nonprofits sheds light on many of the common questions and myths surrounding campaigns, including the role endowment plays in campaigns.
A Simple Way to Determine Your Endowment Goal
While every nonprofit has different financial goals, there is a simple way to calculate your endowment amount and spending.
Your endowment should be twice your annual budget, and you should spend about 5% of your endowment on operational expenses each year.
Here’s an example:
- Annual budget: $2 million
- Endowment: $4 million
- Amount spent annually on operations: $200,000
With these amounts, your endowment will cover 10% of your annual operating budget. Endowments over this amount can lead to questions about how you’re using your funding, and amounts lower can lead to a hand-to-mouth existence every year.
Endowment Calculation Benefits
Why should you calculate your target endowment amount?
It’s always good to have target funding goals, but here are a few reasons why you should calculate your endowment specifically:
- A simple formula gives you and your board something clear to shoot for. With hot-button topics like endowments, hard numbers can reduce tension and focus conversations on your data.
- Because it’s based on the size of your annual budget, your calculations provide a clear reason why your endowment should grow alongside your nonprofit.
- Having an endowment goal to shoot for gives you a good reason to source planned gifts. Without a goal, they often fall by the wayside.
Start Building Your Capital Campaign Endowment
Ultimately, the best endowment for your nonprofit depends on your operations, current finances, and the state of the stock market. While you should take all of these factors into consideration, this simple formula can help you get a quasi-endowment off the ground.
If your nonprofit is starting its very first endowment, this formula can provide a simple target. Then, as your needs change and your finances become more complex, you can adjust your amount and potentially even start a real endowment, complete with donor restrictions.
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Andrea
Thanks for such a clear and concise description of “endowment” … donor designated or quasi investment fund. The reasons are bang on, too much is disempowering and inhibits (desire for) fundraising and continued capacity building, too little leaves an org. exposed to the varieties of the economy, unanticipated events, etc. I’m sharing this one with several colleagues! Thanks again
Thanks Chris. I’m so glad you find this post useful.
While I appreciate the simplicity of your formula, it’s wise to caution about how endowment income can be seductive. During the 2008 Great Recession, organizations that had become comfortable with 25% – 35% of their budget coming from endowment income had to cut personnel and programs. So the bigger the endowment, the bigger the seduction factor to rely on more and more endowment income, and the bigger the depression during a recession. Board-designated endowment, where the board can re-allocate a chunk of principle for a one-time injection of cash into a key program expansion or unique-opportunity building acquisition, might be better called a reserve fund to avoid confusion with true endowment.
Thanks Anne. You make a wonderful point about how seductive and risky endowment is for an organization. And it’s interesting to think about whether board restricted endowment should better be called a reserve fund. I think they are two different things. In my opinion, organizations might have a reserve fund AND a board restricted endowment. The policies governing spending from a board restricted endowment should be more stringent than those governing the reserve fund. And money coming from bequests should be put into the board restricted endowment. Lots to consider on this topic! Thanks for keeping the convo going.
But didn’t all philanthropic sources dry up during the great recession? It’s not just the reliance on endowments that caused such pain for the non-profit community.
Short, sweet, avoids jargon, and understandable by the average NPO leadership and staff. Simple yes, but far too many NPOs would get lost in more detail as they begin to learn about endowments. A second article could speak to potential pitfalls and other points that should be pondered.
Thanks Sophie! Great idea about a second article.
Our organization had a Campaign for the Future which was a new building campaign with a simultaneous endowment campaign. The campaign was successful, a new building has been built and it created a $3 million endowment for a $1.5 million organization. Recently the cost of everything has skyrocketed and within 2 years we went from being a $1.5 million organization to a $1.8 million organization. Campaign multi-year payments for the building and the endowment fund have ended this year. We are very tight with our expenses and since the expenses have grown the CEO and Board are interested in creating another campaign to grow the $3 million endowment to be $10 million endowment. Does this make sense or is $10 million to large? Also, we will have to go back to the same pool of people who just finished their payments to the original campaign. Is it too soon? In the current market will donors be receptive to an endowment campaign?
Thank you for your comment, Christine. Your organization should have a robust planned giving program to help build your endowment. Over time, that will pay off. It won’t help your short term problem though. Straight endowment campaigns tend to be difficult unless you have some large donors who are passionate about endowment. That’s not common. It’s probably wiser to focus on increasing your annual fundraising to keep up with expenses while you build your endowment more slowly through planned giving. But, your organization may have special situations that would lead to other decisions.