Cash & Liquidity ManagementCash ManagementCash ForecastingWhen it Comes to Cash Management, There is No Room for ‘Charity’

When it Comes to Cash Management, There is No Room for 'Charity'

The ability to manage cash and short-term investments in a not-for-profit environment is as important as the organisation’s public services. Any shortfall in funding, loss of liquidity or unexpected movement in cash flow has an immediate effect on the level of grant funding. Taking the time to set a clear policy, building knowledge of the investment portfolio and developing the appropriate management and control processes are essential in the current environment.

All charities have to provide services that are aligned to their stated aims and objectives, while ensuring they meet the UK Charity Commission’s guidelines on delivering public benefit. In many such organisations, their success and ability to meet these objectives is determined by the skill with which they are able to manage their cash flow and often sizeable investment portfolios. A significant proportion of their annual income may be derived from their accumulated income on investments or from liquidity in short-term capital funds. Management of cash and liquidity is therefore a vital skill in ensuring the survival of the organisation.

The recent past provides testimony to the importance of cash management with a number of organisations suffering losses and lack of liquidity as result of the collapse of the Icelandic banks. Today, the turmoil in Europe is yet again throwing up new issues in how to manage cash deposits and short term liquidity. The charitable sector faces the same cash management decision-making process as a corporate but the policies are linked much more closely to the core purpose of the organisation in terms of providing cash grants.

Creating the Right Environment and Setting Clear Policies for Effective Cash Management

The right environment provides the framework and defines the most important areas management can influence to ensure that, irrespective of the formal cash management policies, cash is managed in a way that is appropriate to the long-term success of the charity or not-for-profit organisation:

  • The trustees should take the time to familiarise themselves with the cash requirements and the types of investment products being used. This should be done with the finance team and any external advisers, covering the core areas of security, liquidity and yield and specifically what assets the cash is being invested in.
  • The objectives and values of the organisation should be reflected in the cash management policies. If the charity has ethical considerations, then these should be incorporated in the choice of investment products that may be used.
  • The definition of policies should be transparent and unambiguous. If the policy states that a ‘sustainable level of return’ or ‘acceptable level of risk’ is required, these need to be defined in detail so that the policy can be implemented and individuals can be held accountable.
  • The delegation of decision-making authority and any associated restrictions must be documented and have appropriate controls and monitoring in place. Frequent reviews and checks should be planned to ensure that correct procedures are actually in use.

How to Build Knowledge of the Cash Investment Portfolio

In the current constantly changing financial environment, trustees need to feel comfortable with financial decision-making, or ensure that appropriate advice is available. The financial knowledge should include consideration of the following:

  • The level of investable cash versus budgeted annual expenditure, combined with the ability to drawdown on capital for grant giving. How much liquidity is required and what are the limits for using capital to make up any shortfalls in annual income? How will this affect any accounting requirements and balance sheet ratios, what is the policy for use of reserves?
  • The accuracy of income forecasts and the variability of income depending on seasons, events or economic trends. There are some charities that over rely on historic income trends to maintain very low reserve levels going forwards, leaving no room for disappointment in the future.
  • The management of foreign currencies and exposure to currency risk needs a well-defined set of policies and clear limits on risk. This should include both the hedging of currency exposure and also the methods of concentrating and pooling cash in international markets.
  • There are often large or significant lump sum payments to be made and these need accurate forecasting. A recent issue has been the increased demand for cash contributions for pension liabilities and any sudden changes as a result of the typical three-year actuarial revaluation.
  • The overall investment objectives must be aligned with the expected returns and associated time horizons. The classic risk versus return equation applies.

How to Choose Where to Invest Cash

The choice of where to invest and how to achieve a market rate of return is no longer straightforward. The large number of potentially investable financial institutions and investments make comparisons and due diligence both time consuming and complicated. The best method is to be clear on the financial objectives and keep it simple:

  • The selection of investment products and use of credit ratings should be set out in as much detail as possible. This would include any special considerations such as ethical investments and the allowable requirements for pooled investments.
  • The returns should be measured against agreed benchmarks and performance targets, both internally and externally.
  • The associated management fees and other costs should be transparent, including internal effort to manage and account for the cash management processes. The frequency of reporting should be linked to investment committee reviews and general accounting requirements.

How to Evaluate the Controls and Level of Financial Risk

The overall risk appetite is a key consideration that needs careful assessment. The trend over the last few years has been towards security of assets rather than yield, and from a charity perspective there is a further factor in that no trustee wants to be responsible for the loss of any cash or short term deposits. The risk levels should be defined based on:

  • The degree of asset diversification and which instruments are available for cash investment. These will range from cash and short-term deposits to money market funds (MMFs). Minimum values should be stated for being maintained in cash or cash equivalents. MMFs have become a more complex area and it is important to understand the instruments and assets behind each fund and therefore the true liquidity if a crisis were to occur. Does the organisation require a minimum amount to be always available in liquid investments, based for example on the forecast of planned expenditure?
  • Counterparty risk has increased with the stresses in the banking system, and careful assessment of the credit ratings of banks and financial providers needs to be made. Large corporates make use of credit default swap (CDS) values to monitor more up-to-date risk assessments but how easy is this for a charity to monitor? If the charity has a banking syndicate, who are the component banks and is there, for example, an exposure to the banks in Greece, Italy or Spain?
  • The overall attitude to risk is important. How does annual income correlate to annual expenditure and how are any gaps closed? Which risks have the greatest impact on returns, is it interest rate risk or inflation risk or social risk? How is risk monitored and reported internally and will there be advance warning of any deteriorating circumstances?

How to Determine the Amount of Liquidity

While the security of cash is vital, liquidity comes close behind in terms of ability to meet grant funding and annual expenditure. A recent survey found that 47% of UK charities are planning to use some of their reserves within the next 12 months. The key considerations to include are:

  • The time horizons for the short, medium and long term. This may involve segregating operating or annual cash requirements from long term strategic funds.
  • The sources of cash, be that annual income or drawdowns from capital. How frequently are drawdowns required and what level of cash must be available for immediate use? Liquidity may mean different things to an external asset manager and what happens during a crisis?
  • The planned capital expenditure, major projects or large one-off payments need to be forecasted along with any potential slippage in the timing.


The pressure for good cash management has never been greater. The need for detailed knowledge and accurate cash forecasts are vital to survive in the current climate. The growing anxiety over the low rates of return on cash will always need to be counter-balanced against the appropriate security and liquidity requirements. Not-for-profit organisations must give ‘looking after cash’ as great a priority as ‘giving it away’.

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation