Liquidity Management for Foundations, Endowments & Nonprofits

Liquidity management is a critical aspect of effective portfolio management for foundations. With limited resources and funding requirements for ongoing programs, it is important for foundations to have sufficient cash on hand to meet immediate needs. Additionally, having a strategy for managing liquidity can help foundations achieve their long-term financial goals, such as maintaining the purchasing power of their endowment and funding future programs.

What is Liquidity Management?

Liquidity management refers to the process of ensuring that a foundation has enough cash or other easily accessible assets to meet its current and future obligations, without having to sell investments at a loss. It is a critical component of sound portfolio management and is essential for a foundation to maintain its financial stability and meet its objectives.

Why is Liquidity Management Important for Foundations?

Effective liquidity management is an essential component of financial management for foundations, as it helps ensure that they are able to meet their financial obligations and operate effectively in support of their mission and goals.

Specifically, liquidity management helps foundations:

• ‍Meet Obligations: Liquidity management helps ensure that a foundation has the necessary funds available to cover short-term financial obligations, such as grant making obligations and operating expenses. For example, if a foundation has committed to making multi-year grants, it needs to ensure that it has enough cash or other easily accessible assets to meet these obligations.
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• Avoid Fire Sales: By maintaining adequate liquidity, a foundation can avoid having to sell investments at inopportune times to meet its obligations. This can help the foundation to maintain the value of its portfolio and achieve its long-term financial goals.
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• Manage Market Volatility: The stock market and other investments can be volatile, and it is important for a foundation to have access to cash or other easily accessible assets to manage these fluctuations. This can help the foundation to reduce the impact of market volatility on its portfolio and achieve its long-term financial goals.

How to Manage Liquidity for Foundations?

Foundations often use various strategies to manage their liquidity, including adopting a formal spending policy, adjusting portfolio assets to factor in liquidity needs, and projecting cash flow needs.

Specifically, foundations can:

• ‍Establish a Spending Policy: One of the key steps in managing liquidity for a foundation is to establish a spending policy. This policy should balance liquidity needs for grant making, current operation expenses, and applicable IRS regulations. It should also define the calculation methodology used to calculate the annual 5% distribution.
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• Diversify Investments: Diversifying investments can help to reduce portfolio volatility and ensure that a foundation has access to different types of assets, including cash and other easily accessible assets. This can help to ensure that the foundation has the necessary liquidity to meet its obligations and manage market volatility. This may include investing in short-term, low-risk assets that can be easily converted into cash and maintaining cash reserves.
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• Monitor Cash Flows: It is important for a foundation to regularly monitor its cash flows to ensure that it has the necessary liquidity to meet its obligations. It is often useful to conduct cash flow forecasting to anticipate and plan for future expenses. This can be done by tracking the foundation's income and expenditures and adjusting as needed to ensure that it has enough cash available. Cash flow monitoring is especially important when a foundation is engaged in activities such as Program Related Investments (PRIs) or when invested private alternatives.
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• Work with an Advisor: Working with an advisor can help a foundation to better understand its liquidity needs and develop a plan to manage its investments and ensure its financial stability. An advisor can also help the foundation to monitor its portfolio and make adjustments as needed to ensure that it has enough liquidity to meet its obligations. Additionally, the advisor can help provide foundations with other liquidity management tools, such as lines of credit, to access additional funds if needed.
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How an Outsourced Chief Investment Officer (OCIO) can assist with Liquidity Management:

An outsourced chief investment office (OCIO) is a third-party that provides investment management services to organizations, including foundations. An OCIO can offer a range of services, including portfolio management, investment strategy development, and risk management. An OCIO can bring a wealth of investment knowledge and expertise to a foundation, as well as provide access to sophisticated investment tools and resources.

For example, the OCIO can assist a foundation with:

• ‍Investment Strategy: An OCIO can assist a foundation with developing an investment strategy that includes a focus on liquidity management. The OCIO can help determine an appropriate level of cash and short-term investments in the foundation's portfolio to meet immediate needs, while also considering the foundation's overall investment goals.
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• Portfolio Management: An OCIO can manage the foundation's portfolio to ensure adequate liquidity, taking into account the foundation's spending policies and investment objectives. The OCIO can also monitor the foundation's cash balances and make adjustments as necessary to ensure sufficient liquidity.
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• Risk Management: An OCIO can help a foundation manage risk by diversifying investments, including cash and short-term investments, to minimize the risk of significant losses in the event of market volatility.
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• Cash Flow Planning: An OCIO can assist a foundation with cash flow planning, including forecasting cash inflows and outflows, and making recommendations for cash management strategies to ensure sufficient liquidity.

Conclusion

Liquidity management is an important component of portfolio management for foundations, and it is essential for these organizations to maintain their financial stability and support their grantees. By establishing a spending policy, diversifying investments, monitoring cashflows, and working with an advisor or OCIO, foundations can better manage their liquidity and achieve their long-term goals.

Modern x Fiduciary: At Fire Capital Management, we combine the personalized service you deserve with a modern approach to investment management you can feel. Partnering with Fire Capital is tailored, transparent, and flexible. We will develop a custom plan across traditional and alternative asset classes in both the public and private markets to meet your unique needs.

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