Strategic Cash Reserves for Religious Organizations
Does your religious organization have too much cash?
Psst, we’re trying to be funny to make a point. You likely answered “No!”, but, as a matter of fact, many religious organizations have more cash now than at any time in their recent history. This is due to Paycheck Protection Program (PPP) loans, the Employee Retention Credit, and reliable donors that continue to make contributions on an annual basis. Unfortunately, we see too many religious organizations sitting on this cash and not putting it to work for them.
According to a June 2022 survey from Invesco, the typical organization currently maintains 55% of its short-term investments in cash, the highest figure since 2016. And with inflation and uncertainty spiking, decision-makers should take action now to maximize their return on excess cash.
So how can your organization think more strategically and take action on your cash reserves?
- Get Perspective –Quite often, no one is paying attention to the rates of return on cash in the bank. A smart idea is to request a listing of bank balances and current rates along with each month’s financial reporting package.
- Get Buy-in – Leadership can’t make decisions on data it doesn’t have. We recommend doing a brief analysis to show what the organization could be making if the funds were invested conservatively. Calculate and show minimum operating balances so leadership can clearly see how much cash could be invested.
- Align with Values – It’s important to begin having discussions with governance about the types of investments that are acceptable and if a values-based filter should be used when evaluating investments. This typically comes into play when evaluating longer-term investments and aligning your investments to reflect the values of your organization.
Practical Considerations
Options to consider (yields quoted as of April 4)
- According to a March 29 survey from Bankrate, the average yield on a traditional savings account is still just a paltry 0.23%. It is certainly possible to shop around for better rates, but it’s also important to keep in mind that FDIC insurance for institutions is limited to $250,000 per bank. Conversely, compare savings account yields to the 4.80% current rate on a six-month U.S Treasury bill. If you go out a bit longer to lock in your rate, one-year U.S Treasury rates are 4.50% and two-year rates are 3.84% (Treasury.gov). On a hypothetical $1 million cash reserve, the difference between 0.23% in a savings account and 4.80% in six-month Treasury bills amounts to $45,700 in extra interest annually.
- Treasuries are liquid, safe, and fully backed by the American government (similar to FDIC insurance, but without any dollar limits). But it is important to remember that Treasuries are not riskless unless held to maturity, as prices can and do move prior to maturity. So, as you consider the attractive yield on Treasuries, it is often best practice to assume that those funds are unavailable until maturity, even though that is not technically the case.
- In practice, a combination of FDIC-insured bank deposits and U.S. Treasuries can strike the right balance between readily available cash and maximizing yield. For example, an organization could keep three months of operating reserves in checking/savings while putting the remainder of shorter-term reserves into Treasuries.
Consider an endowment
You may ask the question – what should I do with my investment return? Consider establishing an endowment, which can provide a long-term, annual income stream to help your organization become more financially secure. Your endowment will be around in perpetuity, which can help to ease some angst about changing donor demographics, tendencies, and abilities.
How we can help
CLA’s Nonprofit Investment Advisory + Consulting Services were developed to help nonprofits fulfill their philanthropic mission and navigate financial uncertainty by leveraging our experience and knowledge in nonprofit finance, cash and reserves management, governance, risk management, and investing. Contact Peter Holupchinski for more information at peter.holupchinski@claconnect.com.
(Contributors to this article were Alex Hengel, Jeff Roberts, and Peter Holupchinski.)
Jeff loves helping nonprofits achieve financial excellence through improved monthly reporting, cashflow management, strategic planning, and systems design.
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