Investment and Financial Sustainability

Nonprofit organizations rely to a certain extent on private donations to provide services to clients or targeted populations. However, this stream of revenue tends to represent a low percentage of nonprofit revenues. Nonprofit organizations use a variety of sources of income to generate revenues for their programs and activities. Investment is one of these sources of revenues. This chapter suggests selected investment options that nonprofit organizations can use to strengthen their financial sustainability.

DEFINING "INVESTMENT"

Investment is the purchase of a financial or real asset by an individual, an organization, or an institution, in order to generate a return over time, which is proportional to the risk assumed during the investment period. In other words, an investment implies a purchase to generate a return or a profit. An investment occurs for a specific period of time. An investment is made with an assumed risk of earning a return or incurring a loss. Investment refers to any item or asset purchased by an individual or an organization with the hope that such purchase will generate income in the future. In other words, an investment is not expected to generate income immediately, although that is possible. For example, a student who goes to school to earn a degree is making an investment that can result in securing a better employment position to earn more money than before holding the degree. The investment is expected to generate a result, mostly after graduation. The student who invests in earning a degree usually cannot expect to secure a new employment position immediately for which holding a degree is mandatory. However, that is possible in the future. As I said earlier, it is possible that a student can earn a better job while in school, which can constitute an early return on investment. The profit will be generated in the future. The meaning of the term "investment" may vary depending on whether one is in finance or economics. In finance, "investment" means purchasing an asset that can be appreciated, earn interest, or generate dividends over time. In economics, "investment" implies the accumulation of new equipment, machinery, buildings, inventories, or other physical entities that can help generate income.

TYPES OF INVESTMENTS

The are several types of investment. The most common are short-term investment vehicles and fixed-income securities.

Short-Term Investment Vehicles

Short-term investment vehicles are investments made for a maturity period of 1 year or less. Usually, short-term investment vehicles are traded in the money market. They tend to generate a lower return on investment and carry more risks than long-term investments.

Short-Term Investment Strategies

Short-term investments are investments, such as an operating reserve or a rainy-day fund, which are set aside to be used for unexpected events. They must generate market returns while being invested in an a safe and liquid investment vehicle. Nonprofit organizations use cash-flow forecasting systems to track their short-term investment decisions. Usually, the budgeting process is the venue that provides the opportunity to either make or anticipate short-term investment decisions. The idea is that the operating budget will provide indications of cash inflows and cash outflows, and indicate when is the best time to make an investment. Examples of short-term investments are commercial paper, money market mutual funds, bankers' acceptances, repurchase agreements, bank offerings, and U.S. Treasury securities.

- Commercial paper: Investment of $1 million or more for a period of a few days up to 270 days.

- Money market mutual funds: Investments of $1,000 or less in mutual funds, which can be redeemed at short notice.

- Bankers' acceptances: Bankers' acceptances are short-term securities through which a bank agrees to repay a loan to the holder of the vehicle in case the debtor fails to pay.

- Repurchase agreement: Contractual agreement to sell an investor securities while agreeing to purchase the securities at set dates and prices.

- Certificates of deposit: A certificate of deposit is a debt instrument that a bank issues to attest that a specific sum of money has been deposited by an account holder at the issuing institution. A certificate of deposit bears a maturity date and generates a specified interest rate.

Bank offerings: Interest-bearing accounts or certificates of deposit offered by banks and insured by the Federal Deposit Insurance Corporation (FDIC).

Treasury securities: These represent financial obligations of a government issued at a discount from the nominal value for a period of less than a year. They include securities, such as Treasury bills, Treasury notes, and Treasury bonds, which are guaranteed by the full faith and credit of the U.S. government.

 
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