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Commentary & Insights

Insight, Nonprofit

Navigating Nonprofit Spending: Crafting an Effective Spending Policy

22 May 2024

By: Lisa Neff

The importance of a spending policy is often overlooked in the nonprofit world. 

A spending policy is a written document that sets the rules and guidelines for determining the amount of the nonprofit's funds that can be spent annually. It's about striking a balance between moving the mission forward while maintaining sufficient resources to fight another day. 

Nonprofits typically include founders with a vision and volunteers who share the passion. It’s easy to allow enthusiasm for the mission to facilitate spending creep. A spending policy provides a reminder, not only to existing staff, but future team members as well, that the long-term financial viability of the organization is critical.

The nonprofit should have an investment policy (see our Insight on the Investment Policy Statement). The spending policy complements the investment policy. It is a tool for informing strategic planning by providing guidance on the level of resources available to the nonprofit and how these resources can be used to support the organization's mission and goals. A spending policy facilitates clarity and transparency and thus helps build trust and confidence among donors, stakeholders, and the public. 

Additionally, it promotes the long-term financial sustainability of a nonprofit by balancing the need to use investment funds to support current programs and services with the need to preserve these funds for future generations. Spending guidelines can be complex and beyond the scope of this Insight. Examples of methods include setting the spending rate to an average of the market value of the endowment over a given time period, limiting the draw to the income produced, or having a targeted spending percentage with minimum and maximum percents allowed such as 4%-7% depending on the organization’s needs.

It's essential to regularly review and monitor the spending policy to ensure that it remains aligned with the nonprofit's goals and financial circumstances. This may involve revisiting the target spending rate, adjusting for changes in the investment landscape, and making any necessary revisions to the policy to ensure its effectiveness.

A spending policy isn't a bunch of rules and regulations - it's a tool to help your nonprofit thrive. By setting clear guidelines for how funds are managed, you can ensure that every dollar is used to further your organization's mission and make a real difference in the world.