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Policies and Procedures: Investment Policy

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Cash management and liquidity are critical for nonprofit financial health and sustainability. This generally involves some form of investment. Nonprofits often rely on a range of investments—savings accounts, money market funds, certificates of deposit, stocks, bonds, and other financial instruments—to help demonstrate their commitment to mission accomplishment.

However, as beneficial as investments are they also have risks. It is important to intentionally consider the appropriate balance of risk and return that aligns with the nonprofit’s objectives. To responsibly manage these, nonprofits should establish a comprehensive Investment Policy.

 

In developing an investment policy, the board should consider when the cash is needed, the nonprofit’s risk tolerance, any types of investments that are in opposition to the nonprofit’s mission, and the goals for each type of investment.

 

Key Elements of an Effective Nonprofit Investment Policy

Here are some core components to consider when creating an investment policy:

  • Purpose – Define the intent behind each fund, especially if different funds serve varying objectives.
  • Investment Objectives –Tailor objectives to your specific organization. This will likely vary by investment type as short-term objectives differ from long-term objectives
  • Asset Allocation – this corresponds to the objective but looks at the whole to determine how much should be allocated to each objective
  • Risk tolerance –Consider what level of risk is acceptable to your organization. In my experience, I have found that doing confidential surveys with leadership can reveal considerations that might not otherwise be identified in some situations.
  • Responsibility assignment – Who is responsible for what? Clearly define roles such as board members, investment committee, outside advisor, etc.
  • Monitoring and management – Who is responsible? Is this in-house or delegated to an external investment manager? It is important to specify ongoing oversight processes.
  • Types of Investments or Allowable Investments – List the types of investments that are aligned with the organization’s values and risk tolerance.
  • Spending policy – generally applicable to investments with an annual spend, but can define parameters for frequency and/or amount of any investment
  • Rebalancing – Outline how and when to adjust asset allocations as financial conditions change.
  • Donor restrictions – Identify any donor-imposed restrictions on fund use, purpose, and/or perpetuity restrictions
  • Review and update requirements – The policy should be dynamic and adapt to the changing environment and needs of the organization so regular review and updates are essential.
  • Reporting – Identify who is responsible for reporting, what reports are required, and who should receive the reports.

 

Investment policies are an essential part of nonprofit governance, providing a framework to safeguard financial resources and support mission-focused growth. A well-designed policy not only protects assets but also reinforces donor confidence, demonstrating responsible and effective use of funds. Like all financial policies, it is imperative to tailor your Investment Policy to your nonprofit’s specific mission and goals.  Generic, overly generalized policies can leave your organization open to risk. Be sure to explore the other installments of our Policies and Procedures series including the Conflict of Interest Policy, Whistleblower Policy, and Document Retention and Destruction Policy. For help building a strong, comprehensive policies and procedures guide for your nonprofit, follow this link to learn more about our Nonprofit Advisory Services.

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