Cash & Investment Management for Nonprofit
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CASH &INVESTMENT MANAGEMENT FOR NONPROFIT ORGANIZATIONS 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 978-646-8600, or on the web at www.copyright.com. 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Library of Congress Cataloging-in-Publication Data: ISBN: 978-0-471-74165-7 Printed in the United States of America. 10987654321 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page v CONTENTS About the Authors xix Acknowledgments xxi Preface xxiii CHAPTER 1CASH 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 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page vi vi CONTENTS CHAPTER 2CASH 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 3CASH COLLECTIONS AND POSITIONING 74 3.1 Introduction 75 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page vii 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 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page viii 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 4CASH 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 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page ix 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 5BANKING 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 John Zietlow ftoc.tex V2 - 03/08/2007 9:12pm Page x 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