Endowment Fund Management: 5 Effective Accounting Tips

Endowments are the result of a successful long-term strategic plan. Through major giving and capital campaigns, your organization has created a pool of endowed funds to create a consistent funding tool in perpetuity.

That is wonderful—if you have the tools to accurately track and manage all the moving pieces. Otherwise, you are setting yourself up for a lot of spreadsheet-induced headaches.

From maintaining donor intent to tracking distributions and investments across funds, endowments have a lot of details to manage. Here are five best practices to help you streamline your endowment management and improve transparency with your stakeholders.

5 Best Practices for Strong Endowment Management

Endowments symbolize strength for an organization. They are intended to continue in perpetuity, with the organization using only a percentage of earnings each year. The donors contribute to the endowment with the idea that they are supporting your long-term mission. When those contributions aren’t managed correctly, you can lose the trust of your donors and put that long-term vision at risk. Regulations like UPMIFA also require clear tracking of your endowed funds.

If your organization has an endowment or is looking to start one, here are some best practices for managing your endowment accounting.

1. Create a Single Source of Truth for Your Endowment Operations

It’s hard to follow donor intent if no one can find the donor agreement. Capture all the moving pieces—donor agreements, disbursement records, and investment statements—in one place for easy reference and improved communication.

Over time, your endowment could grow to include hundreds or thousands of gifts, and you need to be able to see them individually as well as in total. With the right system, you can pool multiple gifts while also tracking them individually. Choose a system that will also enable you to attach guiding documents directly to donation records, so those files will follow the funds for the length of the endowment. This streamlined document management also helps with business continuity. The information stays in the system and doesn’t leave when a key member of your team retires.

A single source of truth makes it easy to access and communicate the important details of your endowment. You bridge the gap between your development, communications, and leadership teams as well as the ultimate user of the endowed funds, like a scholarship committee. Your communications team needs a holistic view of your endowment, your development team needs to easily see how a specific donor’s funds have been used, your leadership team and fund users need to see what is still available for future needs.

2. Maintain Data Health with Strong Internal Controls

Use your system to help enforce your internal controls and mitigate risk. Role-based access enables your finance team to securely pay invoices and review expenses. Incorporate automated accounts payable to minimize manual entry and help you reconcile your accounts faster. You can also easily send the file to other areas of the organization for disbursement, such as getting the information to your tuition management platform to make sure financial aid is applied to a student’s record.

You can also set spending controls that prevent a fund from going over budget. If an expense comes in that goes over the amount allotted, that expense can be rejected or sent for additional review. Another spending control is restricting the account code that an expense can be coded to within an endowment.

3. Establish Clear Reporting

To manage expectations and to make sure you are abiding by all the appropriate legal requirements, it’s crucial to provide clear reporting to all stakeholders on how the endowment funds are used.

Your endowment likely has very different stakeholders, each with unique reporting needs. Your reports to a donor will be different than the reports that you send to your board or your auditors. Everyone will need the data presented differently.

Understand what your stakeholders need so they can communicate the strength of your organization. Talk with your development team about what would be helpful to access so they can communicate to donors about who received the scholarship they funded, for example. Clear reporting can also help your development team show potential donors the impact they could have and encourage additional donations to the endowment.

Your reporting is also crucial to understand any growth of the original corpus and what should be allocated back to each fund. With a fund accounting system built for endowment management, you can appropriately allocate earnings by fund as well as see the beginning and ending balances of the fund at each reporting benchmark. Leadership gets a comprehensive view of the endowment’s overall health, performance, and trajectory.

4. Automate Allocations to Save Time

Precise allocation allows your organization to maintain compliance and empower effective stewardship. When you are able to handle allocations of investment earnings and administrative fees accurately, your organization maintains donor trust, complies with regulations, and provides stakeholders with reliable spendable balances. 

Some fund accounting systems provide allocation modules that use rule-based logic to automate journal entry creation and provide a full audit trail. This automation frees your team to review and post allocations to the general ledger, knowing every adjustment is documented.

5. Use Transaction Codes to Simplify Segmentation

Good segmentation clearly defines and tracks the components of your endowment fund balance. This includes identifying the original gift corpus, differentiating between spendable and non-spendable amounts, and understanding the purpose and restrictions attached to each fund.

If you are like many endowment managers, you often have to handle segmentation manually in spreadsheets. That often leads to broken formulas, outdated links, and accidental overwrites that wreak havoc on your data, leading to hours spent investigating and fixing errors.

Some fund accounting platforms offer a feature that simplifies endowment fund segmentation: transaction codes. These codes allow you to organize and analyze financial data across multiple dimensions, reducing the need for manual tracking and external spreadsheets.

Transaction codes can be tailored to your organization’s needs. For instance, you can assign codes based on donor, purpose, or fund restrictions, creating a clear and consistent framework for tracking activity. Unlike traditional systems, transaction codes retain equity, so you can track principal and spendable balances simultaneously. This ensures that your data remains accurate and accessible at all times.

Choose the Right Fund Accounting Foundation for Endowment Management

The right technology is at the center of your streamlined endowment operations. Fund accounting software with sub-fund capabilities allows you to track as many funds as you need while also seeing the endowment as a whole.

If you are looking for a fund accounting system with native endowment management tools, check out Blackbaud Financial Edge NXT. With built-in internal controls and nonprofit-specific reporting at the touch of a button, Financial Edge NXT simplifies endowment management at every step. See how with our infographic, Simplifying Endowment Management with Fund Accounting Software.