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Endowment funds are permanently restricted and the principal cannot be used for operating, cash flow, or even emergency purposes. For small and midsized organizations, having a good deal of money in hand but out of reach may prove particularly frustrating if fully funding current operations presents a serious challenge. In addition, managing endowments can be complicated and involve some risk if long term investments are involved. Specific rules may need to be followed regarding disbursements from the endowment, and, in some states, the Uniform Prudent Management of Institutional Funds may apply.

It's generally better for small and midsize organizations to accumulate adequate day-to-day working capital cash, and to build a board designated operating reserve in addition to other practical reserves, well before considering establishment of endowment. Of course, you may not want to say no if a donor only wants to create an endowment and cannot be persuaded to support the organization in a less restrictive way.

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