Cash & investment management for nonprofit organizations

451 Pages·2007·2.578 MB·English

by  John T Zietlow, Alan G Seidner

C & I
ASH NVESTMENT
M
ANAGEMENT FOR
N
ONPROFIT
O
RGANIZATIONS
JOHN ZIETLOW
ALAN SEIDNER
JOHN WILEY & SONS, INC.
Copyright  2007 by John Wiley & Sons, Inc. All rights reserved.
Wiley Bicentennial Logo: Richard J. Pacifico
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
any form or by any means, electronic, mechanical, photocopying, recording, scanning, or
otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright
Act, without either the prior written permission of the Publisher, or authorization through
payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood
Drive, Danvers, MA 01923, 978-750-8400, fax [phone], or on the web at
www.copyright.com. Requests to the Publisher for permission should be addressed to the
Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,
201-748-6011, fax [phone], or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the
accuracy or completeness of the contents of this book and specifically disclaim any implied
warranties of merchantability or fitness for a particular purpose. No warranty may be created or
extended by sales representatives or written sales materials. The advice and strategies contained
herein may not be suitable for your situation. You should consult with a professional where
appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other
commercial damages, including but not limited to special, incidental, consequential, or other
damages.
For general information on our other products and services, or technical support, please contact
our Customer Care Department within the United States at 800-762-2974, outside the United
States at 317-572-3993 or fax [phone].
Wiley also publishes its books in a variety of electronic formats. Some content that appears in
print, however, may not be available in electronic books.
For more information about Wiley products, visit our Web site at http://www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
ISBN: 978-0-471-74165-7
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagev
CONTENTS
About the Authors xix
Acknowledgments xxi
Preface xxiii
CHAPTER 1 CASH FLOW AND YOUR CASH POSITION 1
1.1 Life in the Nonprofit Finance Office 2
1.2 Target Liquidity as the Primary Financial
Objective 4
(a) What Is Liquidity? 5
(i) Narrow Definition of Liquidity 5
(ii) Solvency 5
(iii) Financial Flexibility 6
(iv) Broad Definition of Liquidity 6
(b) Why Is Achieving Target Liquidity the
Preferred Operational Primary Financial
Objective? 6
(c) Why Do So Few Nonprofits Strive for and
Achieve Target Liquidity? 10
1.3 Setting Your Liquidity Target 12
(a) Starting Points 12
(b) Calculate Key Ratios 14
(i) Solvency Ratios 14
(ii) Liquidity Ratios 16
(iii) Financial Flexibility Ratios 19
(c) Evaluate Your Ratios in Light of Your
Starting Points 21
1.4 How Do Proficient Cash Management and
Investment Management Enable Your
Organization to Achieve Its Liquidity Target? 20
(a) Cash Management 20
(b) Investment Management 21
1.5 Summary 23
v
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagevi
vi CONTENTS
CHAPTER 2 CASH PLANNING AND LIQUIDITY 25
2.1 Cash Flow Characteristics of Nonprofits 26
2.2 Cash Shortfalls and What to Do about Them 27
2.3 Tiers of Liquidity and the Spectrum of Liquidity 28
2.4 Measuring and Managing Solvency, Liquidity,
and Financial Flexibility 29
(a) Measuring and Managing Solvency 29
(b) Measuring and Managing Liquidity 31
(c) Measuring and Managing Financial
Flexibility 32
(d) Broad Liquidity: An All-Encompassing
View 33
2.5 Managing Cash Flow 33
(a) Cash and Demands for Cash 33
(b) Cash and Value for Liquidity 34
(c) Cash Collections 35
(d) Cash Concentration/Positioning 35
(e) Cash Disbursements 35
2.6 Cash Budgeting 36
(a) Cash Budget 36
(b) How to Construct a Cash Budget 37
(i) Cash Budget and Its Purposes 38
(ii) Forecasting Your Cash Position 40
(c) Using the Cash Budget to Help Set the
Target Liquidity Level 42
(i) Cash Position 44
(ii) Responses to Financial Difficulties 44
2.7 Summary 46
Appendix 2A Sarbanes-Oxley Compliance Checklist 49
Appendix 2B Cash Conversion Period 60
Appendix 2C Hypothetical Case Study for Setting
Target Liquidity 64
Appendix 2D Cash Forecasting Methods 68
CHAPTER 3 CASH COLLECTIONS AND POSITIONING 74
3.1 Introduction 75
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagevii
CONTENTS vii
3.2 Objectives of Cash Collections and
Positioning Systems 76
3.3 Front End of Collections: Receivables
Management 78
(a) Your Organization’s Revenue Cycle 78
(b) Metrics to Reduce Your Organization’s Risk 79
(c) Accounts Receivable 79
(d) Grants or Contracts Receivable 79
(e) Contributions and Pledges Receivable 80
(f) Collections Function 80
3.4 U.S. Payments System 81
(a) Coins and Currency 82
(b) Checks 84
(c) Card Payments 86
(d) Electronic Payments Using the ACH System 87
(e) Wire Transfers 87
3.5 Expediting Check Collections 88
(a) Remote Capture 89
(b) Pre-Encoding Deposits 89
(c) Lockbox Systems 89
(i) In-House System 89
(ii) Bank or Third-Party System 89
3.6 Accepting Card Payments 90
(a) Debit Cards 90
(b) Credit Cards 91
3.7 Accepting Electronic Payments 91
(a) Direct Payments 91
(b) TEL and Internet Payments 92
3.8 Comparison of Alternative Collection Systems 92
(a) Timing and Effect on Cash Position 92
(b) One-Time, Monthly, and Per-Payment Costs 92
(c) Control/Stewardship/Accuracy 94
(d) Donor Marketing 94
(e) Other Factors 94
3.9 Cash Positioning 94
(a) Mobilizing Cash 94
(b) Objectives of Cash Positioning Systems 94
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pageviii
viii CONTENTS
(c) Pooling/Netting/Overlay 95
(d) Establishing Your Banking Network 95
(i) Zero Balance Accounts 96
(ii) Concentration Account 96
(iii) Deposit Concentration 98
(iv) Effect of Nationwide Banking 98
(v) Importance of TWS or Bank
Information System 98
3.10 International Cash Collections and
Concentration 98
(a) Differences in Foreign Payment Systems 98
(b) Cross-Border ACH 99
(c) Pooling/Netting/Overlay 99
(d) Cross-Border Pooling 100
(e) Bringing Funds Back to the United States 101
(f) Foreign Exchange Risk 101
(g) Real-Time Balance Information 101
3.11 Fraud Issues 101
3.12 Imaging 102
3.13 Benchmarking and Outsourcing 102
Appendix 3A Direct Payment Implementation Plan 107
CHAPTER 4 CASH DISBURSEMENTS 109
4.1 Introduction 109
4.2 Objectives of Cash Disbursements Systems 113
4.3 Disbursements Policy 115
4.4 Checks and Drafts 116
(a) Check Utilization 118
(b) Drafts 119
4.5 Purchasing/Procurement Cards 120
4.6 Other Electronic Payments 122
4.7 Comparison of Alternative Disbursement
Systems 126
(a) Simple Disbursement Systems 128
(b) Disbursements Funding in a Simple System 128
(c) Organization Characteristics 129
(d) Complex Disbursement Systems 129
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pageix
CONTENTS ix
(e) Paper-Based Payment Mechanisms 130
(f) Account Funding 130
(g) Electronic Disbursing Mechanisms 131
4.8 Establishing Your Banking Network: Products
and Services to Consider 131
(a) Controlled Disbursement Accounts 131
(b) Zero Balance Accounts 133
(c) Positive Pay 134
(d) EDI and FEDI 135
(i) Electronic Data Interchange 135
(ii) Financial Electronic Data Interchange 135
(iii) Evaluated Receipt Settlement 136
(iv) Importance of Treasury Workstation
or Bank Information System 136
(v) Shopping for Your Organization’s
Disbursement Bank(s) 137
4.9 Fraud Prevention and Internal Control 137
(a) Incidence and Severity of Fraud 137
(b) Preventive Measures 139
(i) Internal Controls 139
(ii) ACH Disbursing 140
4.10 International Cash Disbursements 142
(a) Payment System Differences 142
(b) Guidelines for Making International
Payments 143
(c) International Disbursing Risks 144
4.11 Imaging 144
4.12 Outsourcing Disbursements or Payables 145
4.13 Summary 146
Appendix 4A Prices for Bank Services 149
Appendix 4B Enhancing Internal Controls 155
CHAPTER 5 BANKING RELATIONSHIP MANAGEMENT 163
5.1 Introduction 163
5.2 Objectives for Your Banking Relationship 165
5.3 Communicating with Your Bank 166
5.4 Services Provided by Banks 167
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagex
x CONTENTS
(a) Bank Perspectives on Cash Management
Services 168
(b) How Banks Organize Cash Management 168
(c) How Banks View Nonprofit Organizations 168
5.5 Depository Services and the Availability
Schedule 169
(a) Example of an Availability Schedule 169
(b) Federal Reserve Posting and a Bank’s
Availability Schedule 179
5.6 Bank Selection 180
(a) Nonprofit Bank Relationship Practices 180
(b) Initial Selection of a Cash Management
Bank 183
(c) Staying Away from Financially Weak
Banks 183
(d) Changing Banks 184
5.7 Managing Bank Relationships 185
(a) Account Analysis and the Account
Analysis Statement 189
(i) Uses of the Account Analysis
Statement 195
(ii) Electronic Account Analysis Statement 196
(b) How Banks Charge for Services 196
(i) Computing Compensating Balances 196
(ii) Should We Compensate via
Balances or Fees? 197
(c) Optimizing Your Banking System 198
5.8 Nonbank Service Providers 198
5.9 Information Services 199
(a) Online Banking 199
(b) Special Studies 200
5.10 Banking Globally 200
(a) Consolidation of Banking Relationships 201
(b) Global Aspects of Banking Relationships 201
5.11 Bank Report Cards 201
5.12 Cash Management Audits 202
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagexi
CONTENTS xi
(a) Assessing Your Organization’s Cash
Management Practice 202
(b) Metrics for Internal Evaluation 203
(c) Assessing the Enterprise Resource
Planning System 204
5.13 Summary 205
Appendix 5A Top-Rated Finance Service Providers 208
Appendix 5B Sample Bank Report Card 210
CHAPTER 6 DEBT MANAGEMENT 213
6.1 Introduction 213
6.2 Objectives of Debt Management 214
6.3 Debt Policy 215
6.4 Short-Term Borrowing 216
(a) Why Borrow Short Term? 217
(b) Lilly Study Findings 218
(c) Healthcare and Educational Borrowing 219
6.5 How a Bank Views a Nonprofit Borrowing
Request 220
(a) Banks Lend Based Primarily on Cash Flow 220
(b) Helping Your Chances with a Bank 221
(i) Information to Present to Bank Lender 221
(ii) Typical Loan Structures 221
(iii) How a Bank Evaluates Your
Repayment Ability 222
(iv) How Do Our Net Revenues
Generate Cash? 222
6.6 Debt Management Metrics and Benchmarks 223
6.7 Summary 225
Appendix 6A Linking Mission and Money: An
Introduction to Nonprofit Capitalization 228
Appendix 6B Church Loan Case Study 234
CHAPTER 7 INVESTING PRINCIPLESAND PROCEDURES FOR
OPERATINGAND STRATEGIC RESERVES 240
7.1 Introduction 241
(a) Operating Reserves and Cash Reserves 242
JohnZietlow ftoc.tex V2-03/08/2007 9:12pm Pagexii
xii CONTENTS
(b) Importance of an Investment Policy
Statement 242
7.2 Managing Liquidity Funds and Optimizing
Return on Excess Short-Term Working Capital 243
(a) Cash Flow Forecasting 243
(b) Developing an Investing Strategy 243
7.3 Criteria for Investing 244
(a) Safety of Principal 244
(b) Liquidity 245
(c) Risk 246
(i) Credit Risk 246
(ii) Market Risk 248
(d) Timing of Funds Usage 251
(e) Reinvestment Requirements 252
(f) Money Market Instruments: An Overview 252
(g) Case Study of Risk Taking Resulting in Loss 253
(h) Yield Improvement by Pooling of Funds 255
7.4 Investor or Speculator? 255
7.5 Standard Operating Investment Procedures 256
(a) Documenting Procedures 256
(b) Reviewing the Portfolio 257
(i) Unrealized Gains and Losses 257
(ii) Trading Activity 257
7.6 Investment Operations: An Introduction 257
(a) Selecting a Custodian 258
(b) Bearer versus Registered (and Book-Entry)
Form 260
(c) Securities Safekeeping 261
(d) Operating an Investment Program 262
(i) Executing Transactions 262
(ii) Transaction Memos 263
(iii) Maturity Ticklers 263
(iv) Transaction Log 263
(v) Technology Tools 265
(vi) Verifying Transactions 265
(vii) Reporting Transactions 265