Choosing to organize a corporation under the laws and regulations of nonprofit status is not a sign the organization operates on a shoestring budget. The nonprofit staff and “do-good” board members (I mean that with great admiration) might be wailing enthusiasts for the tired and poor, huddled masses, refuse from teeming shores, homeless, and tempest-tossed, or the organization might be flush with cash and taking it in faster than doling it out. Hospitals and medical organizations cannot let their cash stagnate.

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Running a nonprofit like any business means parking the cash in investments. Nonprofits ought to choose investments that are safe and secure to have the money make money. Staff is usually responsible for a nonprofit’s cash management. All too often they are not trained financial managers but are good-hearted and dedicated to the cause. They think if they manage their own money well, they can manage the nonprofit’s with equal aplomb and success. That is dangerous thinking for an organization. 

I served with fellow board members on the finance committee of a central education policy and planning organization for private schools. All were businesspeople, attorneys, CPAs, and one or two physicians. The organization had a modest budget, but one day the staff fundraiser announced a major gift in the form of stock from a start-up entrepreneur.

The finance committee evaluated the potential for growth and current needs for cash, recommending to the full board to sell the stock following its immediate triple stock price increase valued into the low five figures. Volunteers make decisions slower paced than in our own businesses. We further argued a nonprofit must not invest in speculative stocks because of the risk and fiduciary responsibility of the decision makers to all stakeholders, who in this case are children, parents, teachers, and former staff on pension.

The fundraiser vehemently opposed our recommendation and persuaded board members to hold. The stock tanked three months later to a price below the value of the original donation.

Chris Harty who tracks the rich in America, describes some nonprofits as “absurdly rich.” The Smithsonian Institute is a nonprofit with an annual budget exceeding $1.2 billion. The Easter Seals budget is $1.4b. Harvard University’s endowment fund is $36.4b. All of those organizations outsource management of their investments.

Harvard staff is responsible for teaching. The administration is busy fulfilling the university’s mission. Outsourcing investment management companies’ sole responsibility is to design investment strategies for nonprofits that are safe and secure and make money on the money. The investment firm managing the Harvard endowment funds got a 15.4 percent return in 2014.

First and foremost, investment strategies for nonprofits must operate with complete risk transparency. There can be no secrets and no surprises. Without assessing the costs to fundraising ratios or the value of the nonprofit’s mission, the International Fellowship of Christians and Jews (raises $135 million each year) is a model for every nonprofit. It is among the most transparent organizations. It posts audited financial statements on the Internet along with stories of financial accountability. The Fellowship enjoys a 100 percent accountability and transparency rating from Charity Navigator, an independent ratings agency.

Second, strategies are means for implementing the organization’s goals within its capabilities. A small nonprofit will sacrifice greater returns for liquidity.

Every nonprofit needs a designated financially accountable staff member, a financial affairs committee from board members, and a regular review and investment management by an OCIO, an outsourcing chief investment officer. Together they decide on the best asset allocation, but the nonprofit relies on the OCIO for strategic advice and for performing administrative functions, e.g., filing government reports, producing an annual investment report, recommending new strategies, etc.

The use of social media is a strategic means for enhancing the mission of a nonprofit. Social media expose the competencies and deficits of an organization. They give donors and potential donors input to an organization’s financial sustainability, practices, and competencies in communications and relationship building.

originally published on:   http://www.greenpointglobal.com/blog/investment-strategies-for-nonprofit-organizations

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