By
David Voris, Horizon Bank. This is the
fourth article in a series from the 2013 AFP Liquidity Study
Financial
Forecasting, or the art and science of identifying when the organization will
need funds, is the second important tool
for staff and board treasurers to consider when planning the investment of
funds, and the attached yield curve showing U. S. Treasury rates, can be very
instructive. In this case, the term
“Maturities” equates to risk as the U. S. Government must pay a higher interest
rate for investor’s funds to be tied-up for longer periods of time. Thus, in looking at the above yield curve,
and assuming that we ignore the subject of risk or safety, treasurers can
increase the realized return by increasing the maturities for which the funds
are invested. Thus, the importance of
forecasting should now become clear. If
a treasurer can segment a considerable amount of funds - outside of the daily
operating account - that can be invested over a longer period of time, then the
organization should benefit from somewhat higher rates of return.
Cash
and investable balances are traditionally defined in three categories -
Operating Cash, Short-term Investments, and Strategic Investments. Operating Cash typically refers to those
funds needed within the current accounting period to pay the obligatory monthly
expenses. A 30-90 day timeframe can be
considered for this definition and these funds typically reside as average
balances within the operating checking account. Short-term Investment generally
refers to funds whose use will not be required for a reasonable timeframe,
possibly up to one year into the future. Strategic Investments typically refer
to investment maturities that can extend well beyond 12 months, and many of
these in the case of not-for-profit organizations become funds invested by a
foundation or endowment. The above
segmenting examples are typically done in conjunction with an ongoing
monitoring of the yield curve discussed above and can provide some
opportunities for organizations to increase their realized rates of return.
Questions? Contact
Dave Voris at 317-608-2085 or another Horizon Bank - Indianapolis advisor at
(317) 608-2128 or 117 East Washington Street.