In previous posts, we’ve discussed how nonprofits should strive to hold enough cash to take advantage of unexpected opportunities or unplanned losses. To hammer home the point, we asked Aron Chazen, CEO of Treasury Curve, for his perspective about cash reserves. Among Treasury Curve’s clients are public sector institutions, looking to manage pools of taxpayer money and other public funds to ensure cash is deployed effectively and efficiently. Nonprofits have essentially the same challenge in managing donor, grantor and earned revenue effectively to fulfill the philanthropic mission.
Below are Aron’s answers to five basic questions regarding cash and cash management.
Maya: Aron, how did you get interested in cash?
Aron: I became interested in cash as an asset class because, like most people, I grew up without a lot of it. That created anxiety for me and I wanted to learn how to manage my cash better, as I wasn’t able to control other external factors.
Maya: How do you define cash?
Aron: Cash should be liquid daily and its value should not fluctuate meaningfully from day to day.
Maya: How much cash should an organization hold?
Aron: In my experience, cash management begins with a decent forecast of inflows and outflows. From there, you can set limits on how much to keep in your bank account to ensure you have enough money to pay your bills every day. The next month you can analyze the variance of your forecast with your actuals and adjust your forecast.
It is important to have enough cash in your bank to cover tomorrow’s bills. With that said, it is important to have a way to quickly access additional cash (e.g. from a money market mutual fund) in case there is an unexpected bill or expected incoming cash does not come in.
Maya: Where should organizations put that reserve?
Aron: Institutional money market funds are managed to be liquid daily. In other words, you should be able to keep the majority of your cash in an institutional money market fund that can be swept to your bank account in the same day you need to pay your bills.
Maya: What are the risks that come with holding cash?
Aron: The focus for your cash should always be the safety of principal—or the initial investment—and liquidity. With that said, don’t confuse low or no returns with safety. Sometimes bank accounts pay little or no interest. That does not mean they are necessarily safer than a AAA rated Government money market fund.
There is always a challenge to determine how much cash to keep on hand, where that cash should reside, and how to access it quickly and efficiently. People often keep too much in bank accounts that are earning little or no interest. They justify that by saying they are risk-averse. It is actually often less risky to diversify your cash holdings in a money market mutual fund.
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