There are several main sources foundations draw on to finance their philanthropic activities:
- Endowments – Principal donation invested to generate annual income.
- Annual gifts – Donations made each year by founders/donors.
- Fundraising events – Galas, golf events, etc. used to raise money.
- Investments – Interest, dividends and appreciation on foundation’s assets.
- Fees for services – Endowment management fees or consulting services.
- Program revenue – Earned income from mission-related programs.
The bulk of grantmaking dollars comes from endowment payouts and annual gifts from living donors.
Building the Endowment
The endowment acts as the long-term financial engine driving foundation grantmaking. Here is how endowments are created and structured:
- Seed funding – Typically one large donation from the founder to establish the endowment. Often seven to eight figures.
- Additional major gifts – Other large donations given over time help grow the endowment further.
- Investment strategy – The endowment principal is invested to generate steady annual returns to fund grants.
- Spending policy – Foundations pay out around 5% of the endowment value each year for grantmaking.
- Growth – Earnings above the payout rate get reinvested to build endowment assets over time.
Endowment building and management is a core part of foundation finance operations.
Annual Gifts from Donors
In addition to endowment income, many foundations rely on annual gifts from their founders and other donors to further support grants and operations. These annual donations can fund specific initiatives the endowment earnings don’t fully cover. The annual giving campaign involves:
- Setting a gifts goal each fiscal year.
- Communicating giving needs and opportunities to donors.
- Providing donor recognition and stewardship.
- Working with estate plans to fund future annual gifts.
- Building the annual giving donor base over time.
This supplemental annual income allows foundations more flexibility in grantmaking.
Investing the Assets
To generate income for grants, foundations invest their endowment, cash and other assets. Their investment strategy involves:
- Asset allocation – Mix of equities, fixed income, real assets determined by risk profile.
- Portfolio oversight – Investment committee governs policies and monitors performance.
- Investment managers – Professional advisors selected to actively manage portfolio holdings.
- Spending rate – Percentage of assets paid out annually, typically around 5%.
- Rebalancing – Adjusting asset mix as needed to remain aligned with targets.
A prudent investment approach provides financial stability for grant programs.
Proper financial governance ensures foundation assets are protected and utilized effectively. Financial practices involve:
- Annual budgeting process – Planning income and expense budgets.
- Regular audits – Third party examination of finances annually.
- Public reporting – Form 990-PF filed with IRS and often published.
- Board oversight – Review and approval of budgets, investments, audits.
- Written policies – Documented guidelines for all aspects of finance.
- Staff expertise – Experienced financial professionals managing the numbers.
With charitable dollars at stake, sound financial management is essential.
The primary financial expenditure for foundations is providing grant dollars to causes aligned with their mission. Key grantmaking considerations include:
- Programs priorities – Specific focus areas or needs grants aim to address.
- Grant size – Dollar ranges foundations will consider per request.
- Application process – Instructions for nonprofits to apply for funding.
- Grant cycles – Calendars guiding review schedules and deadlines.
- Grant periods – Length of grant commitment (often one to three years).
- Reporting – Requiring progress reports from grantees.
Defining these parameters helps set expectations for grantseeking organizations.
Robust financial planning, investing, governance and grants management allows foundations to sustainably further their mission. By prudently managing their monetary resources, foundations can make meaningful and enduring impacts on the issues they care about most.