How Intermediate Cash Fund Pools Support Long-Term Investment Portfolios
Nonprofit organizations should expand their cash management policies and procedures to include provisions for establishing and maintaining intermediate cash fund pools. This will not only enhance protection and management of operating (short-term) cash funds, but also act as a conservative buffer for long-term investment strategies, allocation targets, and portfolio risk management.
Intermediate cash fund pools (typically set at 2 to 4 months of the annual operating budget) sit between operating (short-term) fund pools (often set at 1 to 2 months of the annual operating budget) and long-term investment portfolios.
In our article on The Importance of Operating and Intermediate Cash Management Target Policies, we explored the key internal control benefits of adding intermediate cash management fund pools to run alongside short-term cash funds that most often reside in business checking accounts. As we discussed in that piece and in our 5-Minute Lesson on Establishing a Cash Management Target Policy, intermediate cash fund pools allow an organization to better protect and manage short-term cash fund pools.
What may be less obvious is how intermediate cash management fund pools can provide synergistic support for long-term investment portfolios. These benefits would not be present without intermediate cash fund pools. The three main benefits are:
Lowering market volatility exposure;
Expanding fixed income investment strategies; and
Boosting investing confidence and trust.
The top benefit, in my view, is lowering market volatility exposure. Organizations that have long-term investments but do not have intermediate cash fund pools are at risk of having to sell long-term investments unexpectedly when cash flow demands suddenly change. Intermediate cash fund pools can provide a source of funds without having to sell long-term investments.
This benefit is also present when cash flow unexpectedly changes for the positive. For example, this can occur when receiving early program registrations, unexpected donations, or upon a sale of capital assets. Without an intermediate cash fund pool, organizations are forced to either park these funds in checking accounts, which is not a good idea, or hold them in long-term investment portfolios, which are typically not set up to manage funds that will be frequently moving in and out.
Second, intermediate cash fund pools can help with diversification by expanding fixed income investment strategies. Naturally, intermediate cash fund pools will use short period (less than one year) fixed income options (money market accounts, certificates of deposit, short-term bonds, and bond mutual funds are examples). This allows the fixed income portion of the long-term investment portfolio to focus on longer-term fixed income options, such as longer-term bonds.
This leads to an additional, related benefit: intermediate cash fund pools can change the diversification profile of long-term investments. For example, a long-term investment portfolio allocation of 70% equities and 30% fixed income could be viewed as 65% equities and 35% fixed income when a blended computation of intermediate and long-term investment funds is calculated, making the combined funds appear more conservative and less subject to equity market volatility risks.
Finally, overall confidence and trust in investment processes and strategies will be boosted when the Board, investment committee, and investment advisor are all aware that short and intermediate cash needs are protected and well-funded through intermediate cash fund pools.
Planning Tip – Intermediate cash fund pools should be controlled by senior management and staff and should not be included as part of the oversight and management processes established for long-term investments. This separation is important for internal controls as well as managing costs. Senior management and staff are in the best position to efficiently and safely manage the flow of funds between operating (short-term) cash accounts, such as checking accounts, and intermediate-term cash management accounts, such as money market accounts and certificates of deposit. Keeping intermediate cash fund pools separated from long-term investment accounts will also save investment advisor management fees and transaction processing charges.
Intermediate cash fund pools act as both a safety and efficiency buffer. They enhance day-to-day management of operating cash funds while also strengthening investment portfolios by allowing them to concentrate on longer-term objectives without the complications of having to support current cash requirements. This is why the use of intermediate cash fund pools has become an accepted best practice by high-performing nonprofit organizations.
