Guy Davies, Insignis Advisory Board Member
by Insignis Cash Solutions in Industry Perspective
Never has there been greater pressure on charities and those who manage their assets. They are faced with increased regulation, public scrutiny and demand on their services. This comes at a time of higher competition for funds, a reduced amount of grants available from national and local government and a low interest rate environment.
Recent publications, such as the Charity Commission’s guidance CC25, and the House of Lord’s Select Committee on Charities report, highlight the need for robust financial management in the sector.
The primary factor for a successful charity is liquidity. Does the organisation have enough cash to make grants, pay salaries, cover rents and other costs that are part of the ongoing expenditure of managing a charity today? This means it must plan and monitor its income and outgoings so that it can meet its short, medium and long term aims. Within a charity’s operational or strategic plan should be the policies, strategies and actions needed to do this. Careful money management will also protect a charity’s funds from misuse.
Sadly, cash is often seen as boring or not important enough to divert valuable charity executive or trustee time to manage properly. Opening new bank accounts is a painful and long-winded process, with the necessary identity checks on the charity and its trustees.
There are charities that can be accused of being ‘recklessly cautious’. Charities can tend to sit on too much cash in the bank on instant access at zero interest rates. Appreciating that inflation in the UK remains low by historic standards, the Government’s inflation target of 2% means that charities are experiencing a negative real return. Unless there is a good reason to hold this cash, the trustees are failing in their duty.
A simple solution to working out the correct level of liquidity is to establish the charity’s cash-flow needs and then prepare written policy covering how long cash may be deposited. In doing so, there are a few key factors to consider:
The Banking Environment
Many larger high street institutions give the impression that they are not interested in taking deposits. New challenger banks are generally much more accommodating to new deposits, and this is often reflected in the better rates of interest they offer.
Charities should investigate the benefits offered by a particular deposit account and consider the rates of interest on offer versus their counterparty risk. Charities should regularly review accounts to ensure they are getting competitive rates, rather than constantly seeking the highest rate. So-called ‘chaser rates’ offered by an institution to attract quick deposits, can be quickly withdrawn or over-subscribed.
A sensible approach would be to balance the benefit of getting a higher rate of interest for depositing a single large sum against the risks involved with depositing with a single institution. A charity should also consider thoroughly which institution to invest with and the maximum amount to be placed in one institution to reduce the risk of lost deposits. By splitting large deposits between different banking institutions, trustees reduce the risk of large losses due to institutional failure, especially if they are protected by the FSCS.
Another consideration might be the timing of interest payments, for example, whether they are monthly or annual. While interest rates are currently very low, timing interest payments on large sums may help with cash-flow planning.
Managing your cash
Cash management need not be difficult, but it does require care and it is not exciting. Good management of a charity’s finances and other assets enables it to succeed in delivering its charitable aims. Trustees should regularly review their cash management arrangements and the costs and benefits of their charity’s cash accounts to ensure their deposits are protected and that charges and rates of interest are competitive.
A deposit of £100,000 in a bank account with a net interest rate of 0.5% earns £500 a year. With a little extra attention and minimal extra risk, an interest rate of 1.0% can easily be achieved. For a fundraising charity, this equates to 10 hours of a good volunteer with a bucket in a good collecting spot. For a grant making charity, this could be an extra grant to further the mission of the charity.
Getting simple cash management right can be very rewarding. It shows the valuable and visible results of a trustee’s commitment to their charity, beneficiaries and supporters.
Those who work in the charitable sector recognise the commitment that this requires of the executive or trustees, and the challenges they can face in serving their charities on a very basic task.
Thankfully, there are firms available to offer charities cost effective cash management and gain access to the whole savings market, removing many of the obstacles highlighted in this report. Charities should take note and act accordingly.