April 2007 NEWSLETTER: Putting the PROFIT into your Not-for-Profit
"Putting the PROFIT into your Not-for-Profit"
This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus is on helping organizations that do good, do better ... by identifying cost-saving or revenue-generating ideas, in order to dedicate more resources to the organization's Mission.
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April 2007: Putting the PROFIT into your Not-for-Profit
This month's PROFIT idea is … put your idle cash to work!
The focus of this article is on the small- to mid-sized organization that relies extensively, if not exclusively, on current donations, member dues, or other funding sources, and doesn't ordinarily consider itself as an investor.
With interest rates at fairly low levels by historical standards, some not-for-profits have reduced their focus on their investment income and investable cash. Sad, because every additional dollar of investment income can be put directly into improved programming. And, improving your investment return doesn't tap into your precious and heavily worked donor base.
So, how to do it? There are really only a few ways to improve your overall rate of return: invest more, earn more on what's invested, or reduce your costs. Fortunately, all of these are easier than you might imagine, and the combined effect of them can be quite worth the effort.
Let's look at each, and review how to actually make these changes happen, particularly if you don't have the time or expertise in this area.
Invest more
Well, if we had more, we'd invest it - right? Stop and make sure, since many organizations have "hidden" cash in several places.
Some NPOs don't realize that they have any funds to invest! They may think that all they have is a bank account that generates only bank charges. So, the first place to start is by identifying all of the amounts that you really have, and to start thinking in terms of getting a return on every dollar, even (especially!) if the dollar in question is simply sitting in a bank account.
Start by looking no further than your main operating bank account. How much is in that account today, right this minute? And, how much is there most days? A simple analysis of daily balances will likely show more cash in that account than necessary. And, with it being so easy to transfer funds on-line these days, why not keep that money invested in a high-rate savings account, and move it back as you need it? With some proper cash management, you can even increase this available cash further (see our March 2007 "5 Minutes to Improve …" Newsletter for more information on this).
Now, look at all the other places where funds may be residing, and look to combine them into one manageable pool wherever possible. For example, local chapters or branches, sometimes even different departments, may maintain funds in separate accounts, and sometimes special-purpose funds have been maintained in separate accounts, "to keep the accounting simple" (talk about the tail wagging the dog!). You can even look at petty cash that isn't used too often - maybe it's better used earning interest! Wherever you can (for example, if there are no specific trust requirements), consolidate these funds into one place that can be managed and invested for maximum effect, with minimum effort.
Earn more on your investments
Before we get to the actual investing, here are some questions to ask yourself:
- What is my investment horizon? That is, when will I need this money? How quickly might I need to free it up for operating or other purposes?
- What is my risk tolerance? If I invest this money, can I stand to see its value decline, even for a short time?
- What can't/won't I invest in? Are there types of investments, or certain companies or geographic areas that my organization simply wouldn't or couldn't invest in as a matter of ethics or policy? (For example, would health-related organization want to invest in a tobacco company?)
- What experience do the organization and its senior people have with investments?
- Do you plan to spend any investment income earned on current operations, or can you wait for longer term growth?
- Do you have other funds invested, and if so, how?
With these important constraints and issues addressed, it becomes much easier to decide what to do, as a number of options will be off the table.
Since most organizations will need to have at least some funds kept very accessible (i.e. liquid) to cover possible funding shortfalls, variations in the timing of receiving funds, etc., let's consider how to get more value out of these funds. Right now, they may be sitting in that operating account earning very little or no interest. But, you say, a bank account is where they need to be, since these funds will be potentially required in a matter of weeks or even days. A quick and easy solution is a dedicated savings account.
With just a bit of shopping around, you will find a wide range of interest rates payable on simple savings accounts. For example, I checked the rates at one of the big banks the other day, and a chequing/savings account paid 0.5% interest, while their straight savings account paid 2.6% interest. I also checked out one of the smaller banks (one without branches …), and the rate was 3.5%. On $10,000 invested over the course of the year, you could increase your earnings from $50 to $260 or even $350 with very little effort. And, remember, this is free money, with no donor acquisition cost, and no donor fatigue - it keeps paying you every year.
A savings account gives you essentially complete liquidity, zero investment risk (just ensure the account comes with CDIC coverage - now up to $100,000), and a reasonable return on your money. Most accounts will let you transfer funds into and out of your chequing account on-line and at any time, so it's basically ready to use whenever you need it. There is one caveat - bank charges - that you need to keep in mind, and this is discussed later in this article.
If you need to keep funds very liquid, even as much as $50,000 to $100,000, you will be hard pressed to do a lot better than savings account rates. It starts to be worthwhile to have someone on the Board or as a trusted adviser with investment expertise, however, to know when you should be increasing your level of sophistication beyond this.
If you have even as little as $25,000 available for longer term investment (perhaps a restricted bequest or endowment), there may be better long-term options, such as mutual funds. This can be a minefield of risk, fees and costs, and administration, however, so it still may not be worthwhile. And, at this level, you will need the benevolent support of an investment advisor to make it viable, since nobody will be knocking down your door to get your business, unless you are in the early stages of accumulating significantly more investments. Often, the savings account approach still looks pretty good.
Once you get over about $50,000 of long-term investable assets, it is time to bring in some expertise. Again, the first step is to answer those risk and diversification questions, and have a good handle on your investment horizon, risk tolerance, and other constraints before you talk to a professional. Until your portfolio is into six or even seven figures, most investment professionals just can't spend the time doing a lot of hand-holding while you sort these issues out.
Reduce your costs
As you move to increase your earnings on otherwise idle cash, you also need to manage your cost of doing so. Bank charges and fees can easily reduce or even eliminate your net return if you aren't careful.
That big bank that pays 2.6% on a savings account also charges a $2-per-month account fee - it takes about $1,000 kept in the account just to cover this small service charge. Deposit and withdrawal fees can increase this, though this bank offers free customer-initiated transfers. The other bank (the bank with no branches), in addition to offering 3.5% interest, charges no service fees, so you are even further ahead.
The other type of charge to watch for is the waived fee. Some banks will waive certain fees in return for maintaining a minimum balance in the account. You should evaluate whether this is a good deal by simply thinking of the waived fee as interest. Do the calculation and see if it's a good rate. For example, if a bank waived its $10 monthly account fee if a minimum balance of $5,000 was held in the account, this would translate roughly into a 4% rate of return - not bad these days. Of course, slip below the minimum for just one day in the month, and your return drops to 0% for the whole month, so manage your cash accordingly!
The other cost, of course, is in someone's time to manage your cash. If you find yourself transferring funds back and forth every day or two, maybe you're cutting things just a bit too close. The time and distraction of staying on top of cash balances every single day may not be worth the extra income. And remember, one NSF charge can undermine several days of good cash management, not to mention causing some ill will with a supplier or partner!
William Harper is a Chartered Accountant and a former not-for-profit Chief Financial Officer - call if you think your financial processes need a tune-up!