What Should Organizations Do With a Large Unsolicited — and Unrestricted — One-Time Gift?
In just three years, MacKenzie Scott has given more than $12 billion in unrestricted funding to hundreds of nonprofit organizations. And there are no signs of stopping as her wealth continues to grow faster than she can give it away.
Through her giving and accompanying Medium posts, Scott is addressing a major gap in philanthropy — the need for unrestricted funding, the lifeblood of any nonprofit organization that supports critical but non-programmatic operations, such as payroll and rent. When an organization runs out of unrestricted cash, it has technically become insolvent.
While Scott’s efforts — and those of like-minded donors — are a welcome development, recipient organizations are often left wondering what to do with these transformational gifts. In fact, we asked ourselves the same question in 2021 when New Profit and several of our grantee partners received large, unsolicited gifts from Scott.
Though the unrestricted funding allowed us to expand our support for social entrepreneurs and other leaders who have lived experience with the systems in our country that need to change, there were many questions we needed to ask and answer, even as the funding hit our bank accounts almost immediately. Should we give larger amounts of funding to each social enterprise? Should we give funding to a greater number of social enterprises? Do we invest in our own internal growth so we can provide better support to our existing social entrepreneurs?
As we went through that process, ourselves and in partnership with several grantee partners, we developed guidance that we hope can help other nonprofit organizations grappling with the same questions after receiving a transformational — and unexpected — gift. This is not intended as financial and strategic advice, but rather to help enterprise leaders think through what to do with a significant influx of unrestricted funds.
There are a number of variables to consider when determining what to do with a gift of this size, so the decisions related to what to do with unsolicited funding are dependent on an organization’s unique circumstances and goals. A large, one-time gift can be thought of as a way to accelerate or advance your efforts. Organizations should ask themselves whether this new gift:
- Helps them catch up to their strategic plan objectives
- Allows them to exceed the goals of their strategic plan
- Is completely game-changing for the organization
After reflecting on these, organizations can work through this decision tree to decide what to do with a large influx of unrestricted funding.
Is the Organization Expected to Live in Perpetuity?
If the organization has an endowment, then the first consideration is whether your current programmatic plan is fully funded. If so, then any excess cash, including this gift, can go into your endowment to support your operating model over time. But if you have shortfalls in your programmatic funding, then you could consider using some or all of the cash to fund these needs before putting the remainder into your endowment.
But if your organization does not currently have an endowment, using this gift as the initial funding for an endowment might be one thing to consider. If the organization — like a college or university, museum, or state park — is expected to live indefinitely, an endowment can subsidize operating expenses over the long-term. However, if you are a mission-driven organization that expects to solve a problem and dissolve, then an endowment is antithetical because existing in perpetuity isn’t part of the mission.
Does the Organization Have a Multi-Year Programmatic Plan?
For mission-driven organizations that don’t expect to live indefinitely, the first question to ask is whether you have a multi-year programmatic plan — and whether there is a financial plan to support it. (If not, stop reading this and start building your plan!) Without these plans, it will not be possible to make an informed decision on what to do with the gift.
If you have both of these plans well-defined — and fully funded — then you have three options. What you choose to do might depend on the nature of your revenue model and whether it is primarily driven by earned income or contributed income.
1. Do More of What You’re Already Doing
Note that this option should only be applied for a limited time. For example, one option New Profit had was to support more social enterprises, at least in the short term. Since we can’t rely on this gift in the future (It is, after all, assumed to be a one-time gift), this is not really a long-term plan but more about expanding programmatic work for a short period of time.
2. Use the Funding for Non-programmatic Activity
This includes infrastructure investments — like new computers or office equipment — paying down debt or embarking on multi-year strategic planning efforts that might require external consultants. Other options would be to invest in staff training and professional development or one-time bonuses to recognize exemplary performance. It is important to think about these expenditures as one-time only so as not to take on additional expenses that might remain even after this gift is depleted.
3. Put the Extra Cash Into Your Reserves
Keep it for a challenging period or unforeseen expenses. Because these gifts are coming with no restrictions, it is important to keep in mind that not spending it is also an option.
Think About Investment and Cash Management Policies
If your organization already has an endowment, then you should be following your existing investment and cash management policies. If you do not currently have an endowment but would like to start one, the first step is to develop an investment policy and get approval from your finance committee.
For mission-driven organizations without the need to establish an endowment, you don’t need an investment policy but you should have or develop a cash management policy.
Typically, with a cash management policy, there isn’t any downside risk with the principal — it’s more about maximizing the income you can earn on the cash by giving up some liquidity for a period of time. If you’re thinking about developing a cash management policy, here are some things to consider:
Cash flow model. Put a cash flow model into place and update it regularly to provide visibility into your restricted and unrestricted cash flow. This will help inform the level of liquidity you need for the foreseeable future, allowing you to determine what excess liquidity you could afford to forgo in exchange for greater interest income.
Risks. Don’t take any downside risk with restricted cash, including taking on public or private debt or equity. Nonprofit organizations should think of themselves as stewards of restricted cash.
Purchasing power. Do take steps to protect the purchasing power of your unrestricted cash over time, especially in high-inflation environments. Given that you can probably forgo liquidity in exchange for income on some portion of all of your cash, you should consider protecting the purchasing power of your “excess” cash through solutions that provide FDIC insurance, including CDARs, or are otherwise secured by a low-risk entity, such as treasuries issued by the U.S. government.
There is a lot to think about when you receive an unexpected influx of unrestricted cash, but you should celebrate the fact that your organization is now in a much stronger financial position. Still, you should carefully consider the various options available through consultation with your executive team, board of directors, finance committee and trusted advisers to determine the most appropriate choice for your organization at this moment in time. And, by considering these options, this exercise can also serve as a forcing mechanism to develop plans and policies that are considered financial and organizational best practices.
Ian Magee is a managing partner and chief financial officer at New Profit, a venture philanthropy organization advancing equity and opportunity in America. Previously, Ian worked at the Heron Foundation and The University of Chicago, after spending the first half of his career in for-profit finance. He is a native of Northern Ireland and currently lives in New York City.