In any organisation, it’s very important to have a strategy for maximising interest on your cash reserves and minimise the associated risk. This latter consideration is especially vital in a non-profit organisation. When you run a non-profit, you often don’t have the number of staff you would like. Much of your cash is raised from government grants or private donations, and the causes or beneficiaries that you’re supporting depend on a consistent cash flow. Your non-profit organisation would therefore be well-advised to have a coherent and streamlined treasury policy in place. This ensures financial prudence and protects your reputation.
So how can such organisations do this?
Understanding the current financial environment
For much of the last fifteen years, organisations would be forgiven for leaving cash reserves in current accounts and doing very little with them. A prolonged period of very low rates, following the 2008 financial crash, meant that interest earned on cash savings was almost negligible. This minimised the returns that a non-profit organisation could generate from easy access or 1-year fixed savings products.
This financial environment has substantially shifted from 2022 onwards. Rates rose steadily and consistently throughout last year, and far into 2023. Some experts now believe these may have peaked, with an autumn of relatively static rates on easy access and 1-year fixed term products – not to mention the Bank of England keeping the base rate at 5.25%.
However, falling rates would still appear to be a distant prospect. This means that if organisations have not devoted time to building a clear treasury policy, they should do so now.
Risk management for non-profit organisations
Risk management is a key part of effective governance in any organisation, so that executives can make informed decisions and act in a timely manner when required. Some of the risks most closely associated with non-profit organisations are:
• Insufficient reserves and cashflow
• Over-dependency on limited income sources
• Inadequate investment management policies
One of the most effective ways to manage risk is to change the way your organisation views cash. Increasingly, financial institutions and experts treat cash as an asset class. Your trustees may wish to consider doing so – cash is a more liquid asset than many others, and can offer minimal risk while still generating substantial return.
Your non-profit organisation should also familiarise itself with FSCS. This is the UK government’s savings protection scheme, ensuring that cash deposited with a financial institution in the UK is protected up to £85,000. Cash placed with one bank or building society that exceeds this amount is therefore at risk. This is why many organisations aim to diversify their cash reserves, to ensure the fullest possible protection.
Finally, your organisation should get to grips with credit ratings and investment grades. These evaluate the credit risk of a prospective debtor, i.e., their ability to pay back debt. You can use these to better understand which institutions are the most trustworthy custodians of your cash. The higher the investment grade, the less likely a bank is to default. The highest possible investment grade from each of the three largest credit rating agencies (Moody’s, Standard and Poor’s, and Fitch) is AAA.
Crafting your tailored treasury policy
Your non-profit organisation’s treasury policy should address three key objectives. These are:
• Building a framework for making future investment decisions
• Helping your trustees to manage your charity’s resources effectively
• Meeting compliance responsibilities, and demonstrating this to the appropriate regulator
To create your treasury policy, it’s important to assess the scope of your investment powers. You should decide how much cash you have in reserve to place into a savings account – taking into account your ideal timing for returns, and the liquidity needs of your organisation. Where is your cash currently deposited or invested? Are there dormant accounts that require your attention? Remember to consider whether your funds are eligible for FSCS protection, or whether you need to examine credit ratings.
Once you’ve established these foundations, it’s time to discuss your organisation’s investment objectives (how much interest you want to generate from savings) and your risk appetite (this helps you determine how long a term you’re happy to invest for). Since non-profit organisations often operate with fewer staff than other entities, it’s also key that you establish who is empowered to take investment decisions, and how investments will be managed over time. This ensures that someone is accountable for meeting the Key Performance Indicators of your treasury policy.
Let’s consider a possible scenario. Your non-profit organisation is a charity with £5 million cash in total. You propose that a maximum 20% of those savings be held with any one bank. This means you’ve set a limit of £1 million. You’d then have to consider investment grades: is the grade high enough for you to trust that bank with £1 million? This is where you must decide your risk appetite. Where the investment grade is too low for you to trust, you’d have to ensure any deposits were limited to £85,000. This ensures they are eligible for FSCS deposit protection.
Leveraging a cash management platform
Using a cash management platform, such as Insignis Cash, ensures that you can put your new treasury policy into practice swiftly and smoothly.
After completing a one-time sign-up process with Insignis Cash, you’ll have 24/7 access to market-leading rates. You’ll also benefit from our platform’s reporting capabilities, covering interest received, portfolio summary and transaction history. This makes the outcomes of your new treasury policy easier to track. Furthermore, we strongly believe that using a cash management platform makes diversifying funds a quicker and easier process. This gives your organisation’s employees more time to focus on charitable initiatives, which in turn potentially allows you to offer greater assistance to your beneficiaries. If your organisation is understaffed, or your people simply don’t have enough time to help beneficiaries as they would like, we believe this could be very valuable.
Insignis Cash offers a broad range of savings products, including easy access and fixed-term products covering up to five years. To find out more about how your non-profit organisation could benefit from Insignis Cash, please get in touch.
You can also download our treasury policy template for non-profit organisations. We’ve designed this specifically to help organisations like yours start building their strategy, with a view to generating higher interest returns on your cash.