What is generally a liquidity requirement for foundations?

Foundations typically maintain a liquidity requirement to ensure they can meet their grant-making obligations and operational expenses without needing to sell investments at inopportune times. The correct answer indicates that a foundation should have liquidity equivalent to approximately 5% of its assets per year, in addition to accounting for investment management costs.

This percentage is important because it reflects a strategic approach toward cash and liquid asset management, allowing foundations to support their charitable missions effectively while also managing the financial implications of their investment strategies. Foundations are subject to spending rules that often require a minimum payout, largely to ensure funds are used for charitable purposes rather than being hoarded. Therefore, the inclusion of investment management costs in determining liquidity is also a thoughtful consideration, as these costs can impact the overall cash flow of the foundation, necessitating additional liquid assets to maintain flexibility.

Choosing this option acknowledges not only operating cash requirements but also aligns with common practices among foundations regarding sustainable financial management strategies.