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.