By Sean McNeil, CPA, MBA,
Accounting and Auditing Director
Looking for new sources of income for your nonprofit organization? It may be hidden in your own treasury in the form of excess cash.
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Nonprofits can invest excess cash with limited risk options that include certificates of deposit (CDs), money market funds and accounts, treasury bills and other short-term, liquid investments.
In today’s market, the reward for investing in limited risk investments can still be significant. Most financial institutions are offering attractive rates for money market funds and certificates of deposit. These short-term investments are a great option if the organization cannot tie up funds for a long period of time.
When choosing low-risk cash investments, certain factors to consider include:
• Current yields on bank deposits
• Investment flexibility
• Liquidity
• Credit quality
• Penalties for early withdrawal
• Likelihood or timing of withdrawal
• Volatility
• Desired term
• Fees
Another factor to consider is the extent to which your bank deposits could exceed the Federal Deposit Insurance Corporation (FDIC) limit of $250,000 in any one financial institution. Keeping a significant amount of funds in an account with one bank can expose an organization to FDIC insurance risk. With interest rates continuing to remain steady over the last couple of years, it also results in a significant opportunity cost in forgone income to the organization.
Establish Nonprofit Investment Policies
The nonprofit board or investment committee should determine which types of investments make the most sense based on mission goals and the operational needs of your organization.
The board has a fiduciary responsibility to protect the assets of your nonprofit, while also ensuring advancement of the nonprofit’s mission. Any investment decisions should be made prudently, and the board should adopt an investment policy that defines the organization’s investment objectives and risk tolerance.
The performance of all investments, even safe products such as money market funds and CDs, should be monitored regularly. If you don’t have an investment committee already, your board should strongly consider creating one to oversee all investments and ensure that board policies are followed.
Through diligent review of your organization’s cash flow expectations and prudent investment decisions, you can protect and maximize your organization’s assets and better position your organization for financial stability.
For other nonprofit organization consulting services, contact us at GT Reilly.
