Nonprofit Cash Management – Five Ways to Manage Cash Deposits
Most articles about “Nonprofit Cash Management” expound on adequate cash reserve or having a line of credit to maintain financial health. “FDIC” is hardly mentioned, that is until March 8, 2023. By now, everyone is aware of the recent bank failures, and perhaps have even sleepless nights, worrying about your deposits. To our relief, at least for now, deposits are safe thanks to government intervention. However, there is still an ongoing question moving forward.
If your nonprofit needs to consistently maintain cash in excess of $250k as working capital, and therefore cannot be invested in anything long term, what should you do to prudently balance between safety, yield, and accessibility?
Before we lay out 5 ways nonprofits can manage large cash balances to maximize yield and protection, some of you nonprofit leaders are thinking “I wish we had that problem,” because your nonprofit operates on a smaller scale. While it is true that the FDIC insures your deposits, it includes only those cash balances below $250,000 at any FDIC-insured bank (or NCUSIF at credit unions), so selecting the right bank and banker can make a huge difference as you grow. Some banks offer nonprofits reduced fees, more relaxed cash balance requirements, and some even offer a higher yield for nonprofit deposit accounts. So, interview a few banks to see what they can offer in deposit rates, line of credit, or credit card before you settle for the bank around the corner. The bank you choose should not only satisfy your immediate cash management needs, but also be able to grow with your nonprofit organization.
1. Diversify your banking relationships yourself.
Duh, right? Let’s get some technicalities nailed down first. The FDIC insures deposits of up to $250,000 per depositor (your nonprofit), per insured bank. Therefore, a nonprofit can open accounts at multiple FDIC-insured banks to have its cash insured up to $250,000 per account. It does not mean multiple accounts at the same bank for the same organization to have $250,000 coverage each. Even if your cash fluctuates around the $250,000 balance, it is good to consider having 2 banking relationships in case one of the banks has a “hiccup.” Spread it; don’t forget it.
2. Work with banks and insurance companies that offer insured cash services.
First, this is not for everyone because the cost of such insurance policies can be prohibitively high for smaller organizations. For the right situation, an organization may choose to purchase private insurance policies that provide coverage for its cash holdings. Private insurance policies that provide coverage for cash holdings greater than $250,000 are typically offered by specialized insurance companies rather than banks. These policies are often referred to as “excess deposit insurance” or “deposit sweep programs.”
Some banks offer insurance above the FDIC limits as well, but rather than charging an “insurance premium”, it may be offered as a type of account that pays a lower yield than its $250,000 limit counterpart. Either way, both offerings can provide coverage above and beyond the FDIC insurance limit and may be useful for managing very large cash holdings.
3. Diversify your deposits with third-party services.
If your nonprofit needs to maintain a cash balance of around $2M, do you want to manage 8 banking relationships? No way! Since this is not a unique challenge to nonprofits, businesses, or high net worth individuals, there are services that do it for you for a fee. One example is MaxMyInterest. It is a cash management platform that can be used by businesses and nonprofits to earn higher yields on their cash holdings while maintaining full FDIC insurance coverage. The platform works by automatically allocating cash across multiple FDIC-insured bank accounts, based on the maximum FDIC insurance coverage available for each account. In light of recent events, it would not be surprising to see more companies offering nonprofit cash management services in the future.
4. Invest in short-term brokered CDs (certificates of deposit).
First, some definitions. When you put money in a CD at your bank, it is a bank CD issued by your bank. Therefore, that amount is included in the $250,000 FDIC-insurance limit. For example, if your nonprofit has $200,000 in a checking account and $100,000 in a CD at that bank, $50,000 is not covered by the FDIC insurance.
But there is another kind of CD, a brokered CD, that is an alternative to traditional bank CDs. Per its name, these CDs are traded and held at a brokerage even if the issuers are banks. There are key differences, such as early redemption limitations, and this article does a good job in laying them out. As with any financial product, it is prudent to have a thorough understanding of them before investing. Once you and your advisors determine this to be suitable for your organization, then these brokered CDs could be a great tool to managing large cash balances. Here is an illustration – your nonprofit needs to maintain $5M total cash, with $3M being the rainy-day cash that will not be touched unless there is an emergency. So, you keep $2M flowing in your bank accounts as we mentioned above, and $3M at a well-established brokerage firm in a “CD ladder”. By investing in FDIC-insured CDs with short-term maturities, you can build a CD ladder by staggering the CD maturity dates such that cash can be available if you need it.
5. Engage a financial advisor with both nonprofit focus and treasury management experience.
If you have made it to this fifth point, good job! It may also indicate that your nonprofit has a “cash management” challenge because you run a large nonprofit. If you don’t already have a financial advisor, what is stopping you? A good financial advisor who understands nonprofits’ financial management can offer insights you and your board may not have considered.
Final Thoughts
“Cash is King” is a refrain repeated every time there are cracks in the economy. No one can afford to neglect its care. Especially for nonprofits, cash flows in and out of the organization quickly, that a solid cash management plan could support the nonprofit through expansions and recoveries. When LENDonate considers a nonprofit’s financing request, cash levels and flows play a big role in the approval process. Whether your organization is planning to finance the purchase of real estate or needs a working capital loan to smooth out your cash flow or needs to bridge cash flow to a future financial event, reach out to us. We will work with you to find the ideal solution that will meet your financing needs.
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