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A well-built spending policy protects today's programs and tomorrow's mission.
Every nonprofit board eventually faces the same question: how much of the investment portfolio can we spend this year without shortchanging the years ahead? The answer lives in your organization's spending policy, and if it has been sitting untouched since the last major market swing, it may no longer reflect where your nonprofit stands today.
At GBQ, our nonprofit advisory team works with organizations across Ohio to build financial strategies that hold up over time. Below is a look at the most common nonprofit spending policies, what drives the difference between them, and why periodic review matters as much as the policy itself.
Why Review The Policy At All?
A spending policy sets the rate at which a nonprofit draws on its investment portfolio to cover operating costs, capital projects, and program needs. Because every organization carries different obligations, donor restrictions and risk tolerance, there is no universal formula that fits all nonprofit policies equally well.
Once a policy is in place, it generally should stay consistent from year to year. Consistency is part of what makes it useful. But consistency isn't the same as permanence. Your board and finance committee should revisit the policy periodically to confirm it still aligns with your mission, cash flow needs and long-term sustainability goals, particularly after a significant gift, a change in program scope or a stretch of unusual market performance.
Five Common Approaches To The Nonprofit Spending Policy
Fixed-rate spending.
This method applies a set percentage to the portfolio's market value at the start of the fiscal year. It's the easiest approach to explain to a board or donor, but it ties spending directly to a single year's performance. A few strong years in the market can push distributions higher than expected, which may erode long-term growth once conditions shift.
Inflation-based spending.
Here, the nonprofit sets a baseline spending amount and adjusts it annually for inflation, sometimes with a floor and ceiling tied to market value. This approach tends to produce smaller, steadier distributions than fixed-rate spending, which can help preserve the portfolio over time. Because inflation assumptions shift, organizations using this model should check their methodology every few years to confirm it still holds up.
Rolling-average spending.
This approach applies a spending rate to a multi-year moving average of the portfolio, often three years. It smooths out some volatility but can still fall short during a sustained downturn, or produce more spending than is prudent right after a market peak.
Geometric spending.
A more complex formula that blends inflation and market performance, geometric spending reduces year-to-year swings and softens the effect of a market downturn on annual distributions. The trade-off is complexity in both calculation and board explanation.
Hybrid spending.
Many nonprofits land here, blending an inflation adjustment for most of the annual spending amount with a fixed-rate component for the remainder. Done well, a hybrid approach produces stability in both dollar terms and as a percentage of portfolio value.
Whichever model your nonprofit uses, most well-drafted policies include a provision letting the board authorize spending above the standard formula when circumstances call for it.
What The Law Expects
Nonprofit spending policies don't exist in a vacuum. Most states, Ohio included, have adopted some version of the Uniform Prudent Management of Institutional Funds Act, which sets standards for how charitable organizations invest and spend endowed funds. A documented policy that reflects those standards supports your board's fiduciary duty and gives donors confidence their gifts are being stewarded responsibly.
Is Your Policy Still The Right One?
How often should a nonprofit review its spending policy?
Most organizations benefit from a formal review every two to three years, or sooner following a major gift, a leadership change, or significant market volatility.
What happens if a nonprofit doesn't have a formal spending policy?
Without one, spending decisions tend to become reactive rather than strategic, which can strain both the portfolio and board confidence over time.
If it has been a while since your organization looked closely at its spending policy, or your financial picture has changed, now is a good time to take a fresh look. GBQ's nonprofit accounting and advisory team works alongside boards and finance committees to evaluate current policies against today's needs and tomorrow's goals. Contact us to talk through what a review would look like for your organization.
