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Making the most of your organization's money
By David Michaels
February 4, 2008

How can charitable organizations make the best use of their funds when it comes to earning money on those funds? By taking a practical approach in the areas of investments and cash management, financial performance may be improved significantly. This article takes a look at two related approaches: investing and cash management.
But we have nothing to invest!
All organizations that have cash in the bank are investing; it’s just a matter of how much they are earning on their cash. An organization might have its cash in a chequing account that earns 0% interest. Another organization may have its cash in a chequing account that pays a small amount of interest if there is a minimum balance maintained on a monthly basis; it may earn 2 - 3% depending on the account arrangement.
Yet another organization may keep most of its funds in a chequing account and buy a Guaranteed Income Certificate (GIC) or a Treasury Bill (T-Bill) with the remainder. Regardless, all organizations are managing money and earning interest, unfortunately the interest rate might be 0% or less than could be achieved.
As a first step, consider whether or not you are properly managing cash. For example, is the disbursement of funds timed advantageously? If funds aren’t needed right away, there may be an opportunity to do some short-term investing.
Also, if you are investing short-term, consider if it’s being done as efficiently as possible. For instance, an organization that keeps rolling over a T-bill or GIC on its maturity may be better off to stagger maturity dates so that it takes advantage of changing interest rates.
It can add up to your benefit quite quickly:

What would it mean to an organization to earn an extra 1% on its investments each year?
Assume that an organization has investment assets of $1,000,000. An extra 1% each year for 5 years would equate to over $54,000 using a 4% annual rate of return on just that additional $10,000 per year!
By taking a different approach to investing, and combining that with the cash management strategy outlined above, that 1% difference can be viewed as a minimal goal – the real benefits could be significantly greater.
These days, any advantage that an organization can gain should be explored. And, taking on additional risk does not have to figure into the equation. By staying with high quality, government-backed bonds and Bankers’ Acceptances (BAs), as two examples, investment returns may be enhanced. To properly balance liquidity requirements, cash on hand must be maintained, and short-term notes (30 to 90 days) should also be considered.
BAs and government bonds are two instruments that can give returns over ordinary GIC rates:
Bankers’ Acceptances: BAs are short-term credit investments from a non-financial firm that are guaranteed by a bank. They trade at a discount from face value and are very similar to Treasury bills. Terms range from 1-2 days to 1 year or more.

Government Bonds: A government debt obligation (federal or provincial) which is backed by the credit and taxing power of the issuer.

Government bonds offer a safe approach, especially for capital preservation. There are typically two types of risk involved with bonds:
i. Interest Rate Risk: changes in interest rates will affect bond prices – there is an inverse relationship between the two. Interest rate risk is more of a factor when actively buying and selling bonds before maturity.

ii. Default Risk: relating to the credit quality in the bond. Only Government of Canada bonds receive the highest (AAA) rating; provincial bonds are rated very highly but do not receive the AAA rating.

A complimentary strategy is a “bond ladder”. This is an approach in which a “ladder” is created by dividing investments evenly among bonds such that they mature at regular intervals. For example, assume that you have $1,000,000 to invest and are comfortable with the longest maturity date being five years hence. By investing $200,000 in bonds with maturities ranging from 1 to 5 years, you get consistent returns, low risk and ongoing liquidity. The ladder also helps to deal with changing interest rates, since renewals come up relatively frequently.
Turning back to our example of an organization with $1,000,000 of investment assets, consider just how much a single, one-time donation of $10,000 would be appreciated. Yet, without taking undue risk, it should be possible for your organization not yet taking advantage of an optimal investment and cash management strategy, to have the equivalent of that donation in perpetuity, and gaining its own interest.
David Michaels is an Investment Advisor with BMO-Nesbitt Burns, Exchange Tower branch, in Toronto. Before joining Nesbitt-Burns, David was in charge of the finances of three legally separate but related medium-sized charitable organizations in Toronto where he used a cash management and fixed income strategy to significantly improve interest earnings.
David can be reached at (416) 365-6038, or via his website at www.davidmichaels.ca.
Opinions are those of the author and may not reflect those of BMO Nesbitt Burns. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is an indirect wholly-owned subsidiary of Bank of Montreal. Member CIPF.