Many companies today are struggling with the effects of inflation and the aftereffects of COVID, and keeping enough cash to operate efficiently is a big challenge. But for others, cash management is a different kind of issue – they have more cash than they need to run the business, including many nonprofit organizations with endowment funds.

For the leaders of those organizations, cash management is more than just day-to-day operations. It’s also about what to do with the cash they don’t need on a day-to-day basis: What to do with it, where to put it, for how long, and what risks to avoid. The answers to those questions are different for every company, and they are ideally encapsulated in their cash management policies, ideally thought out and committed to a written policy. We normally call that an Investment Policy Statement, or IPS.

So, If you have excess cash AND your excess cash is in 7 figures or more, AND you don’t have an IPS, this post is very much for you. If you have a smaller balance to put to work, I suggest you choose a money market fund or a short-term CD – otherwise the effort to set up something more formal is not worth it. So, onward…

First, how do you decide what topics your policy should cover? The best experts in this area suggest these:

• Risk tolerance – how much risk, if any, are you willing to tolerate in putting your excess cash to work? Always keep in mind that risk and reward to hand in hand, higher or lower together. Types of risk include the credit value of the investment, interest rate fluctuations, and ease of liquidity.
• Objective – what do you want the investment to achieve? Do you want to exceed the current minimal CD or Treasury bond rates, just equal them, other? Are you prepared to commit your cash for a longer term or might it be needed next quarter or next year?
• Benchmark – How will you measure the success of your cash investment against your stated goals? Is there a metric, or a blended metric, that you could use to readily see if you are achieving what you intended, both in returns and in risk management? And by the way, how often will you review the results vs. the benchmark?
• Investment manager – Who will you task with managing all this? Choices range from your in-house CFO or treasurer to an outside investment manager. Differences lay in skill in achieving the desired results and cost in fees.

Well, there is one preliminary step – knowing how much excess cash you have. That’s not as easy as it sounds, since it involves actually having a credible cash forecast that tells you when that cash might be needed for seasonal activity, owner distributions or new projects. Are there any bank loan covenants that require you to keep cash balances readily available or do not permit certain kinds of investment?

Admittedly, all I’ve covered in this post are the questions to ask, not the answers, because those answers are unique to each company, and attempting to cover them would require a book, not a 500-600 word blog post. So if you’re still reading, the next step might be to ask your financial advisors to help you formulate the answers that work for you. Or you could ask an independent financial expert to help you develop some answers. Don’t have one of those in your database? We do.

We are Your CFO for Rent.