The Importance of Operating and Intermediate Cash Management Target Policies

Establishing operating and intermediate cash management target policies will provide many benefits. This simple but often overlooked cash management best practice will augment internal accounting controls, boost cash management awareness, and enhance perceptions that nonprofit organization management systems are significant and robust.

I am surprised by how many nonprofit organizations have not established cash management target policies. Establishing a formal bucket (stratification) system for all cash fund categories is a must.

Bucketing begins with considering minimum, maximum, and target parameters for operating (short-term) and intermediate cash funds. These two buckets must be established before consideration of other cash management buckets for investment (long-term) and other special purpose, Board-designated cash funds.

Start by establishing minimum, maximum, and target balances for operating cash funds. The purpose of this bucket is to provide support for everyday operational cash needs. Most nonprofits park operating cash funds in bank business checking accounts, but keep in mind that these accounts are naturally risk exposed to fraud, errors, cyber security, and potentially subject to bank service fees and other related risk mitigation expenses.

The key considerations for short-term operating cash funds are immediate liquidity (ability to quickly access the cash) and safety (limiting risk exposure). When setting the minimum and maximum threshold levels, consider factors such as the size of the annual budget, monthly burn-rates, payroll disbursement cycles, and revenue funding cycles.

The balancing act is to have enough cash available to cover everyday cash needs, but not too much. Holding too much cash in the operating funds bucket increases risk and reduces opportunities for return on investment (ROI), i.e. interest, dividends, etc.

For small to medium-size organizations, consider establishing a minimum operating cash threshold of 30 days of budgeted expenses and a maximum cash threshold of 60 days. Set the target balance at the mid-point (45 days) of the minimum/maximum thresholds. For larger nonprofits, the number of days of cash available can be reduced to boost safety and ROI, while very small nonprofits will find it more efficient to keep most of their cash in business checking accounts.

Next establish a bucket for intermediate cash funds. The purpose of this bucket is to hold cash funds above the maximum threshold level for operating cash funds. It is safer to hold excess operating funds away from checking accounts in other bank and investment vehicles, which also adds opportunity to increase ROI.

For small to medium-size organizations, consider establishing a minimum intermediate cash threshold of 60 days and a maximum cash threshold of 120 days of budgeted expenses, with a mid-point target of 90 days. The vehicles used for intermediate cash funds still need to favor liquidity but can be more focused on ROI than checking accounts. Typically, higher yield money market accounts, certificates of deposit, and very short-term bond investment options are used.

Operating and intermediate cash funds work well together. In this model between 3 months and 6 months of cash availability is covered while also improving safety and ROI.

Planning Tip – Consider adding a list of definitions to the Investment Policy Statement (IPS) for all cash funds held by a nonprofit organization. Including definitions in the IPS for operating and intermediate cash funds will enhance understanding and management of long-term investments. This important context shows that policies and procedures are in place covering operating and intermediate cash needs, thereby helping to focus attention on the long-term perspective of investments.

After establishing policies for operating and intermediate cash funds, consider if other special purpose cash fund buckets are needed, such as Board-designated funds for research, special projects, and reserves for capital expenditures. A bucket for long-term investment funds would be considered after policies for operating, intermediate and special purpose cash funds have been established.