SECTION: FINANCE

5051012 Managing and Maximising Charitable Funds

Published: 05.10.2012 |
Last Updated: 15.08.2013
carmichael
carmichael
Tony Morley

Tony Morley is a Director with BDO Simpson Xavier Private Wealth Management Limited. Tony spent a large part of his career with Bank of Ireland where he managed its €35billion Euro balance sheet. His expertise is in capital markets, liquidity and balance sheet management. ...

Over the last number of years, as the banking crisis and austerity conditions in Ireland accelerated, donations to many charitable organisations fell significantly. Notwithstanding the falling donations, up until earlier this year, deposit rates at domestic banks covered under the Government guarantee held up well. In some instances, charities were able to secure deposit rates in excess of 4% and deposit income became a strong source of additional income for these charities.

In recent times the good news is that the Euro crisis has abated somewhat. On the flip side however, as the crisis abates, deposit rates have fallen significantly and are projected to fall further. Indeed, it is not implausible that short term deposit rates could fall to below 1.50% which is a long way from the hay days of 4%. In this context it is important that charities seek to maximise their surplus funds and deposit income.

Additionally, in an environment of higher regulatory oversight, Trustees and Directors of charities have a higher duty of care than they may have recognised in the past with respect to management and protection of charitable funds. 

There are many considerations that charitable entities must take account of when it comes to protection and maximisation of charitable funds. A good starting position in our view is to develop an investment policy for the charity’s surplus and investment funds.

An investment policy is an all-encompassing document that is specific to each charity.  Specifically it provides clear parameters around certain items some of  which include;

  •  Counterparty risk
  •  Liquidity and surplus cash management
  • Risk Management
  •  Governance

We discuss each of these briefly below;

Review counterparty exposures

Whilst maximisation of deposit income is critical for charitable organisations, the return of capital is more important than the return on capital. The things we took for granted in the past about the security of the global banking system, we cannot take for granted in the future. As Trustees with a fiduciary duty to protect funds, charities should ensure that they are satisfied with the security of the bank they hold their funds with.

Liquidity and surplus cash management

Our experience indicates that many charities hold most of their surplus deposits on short term deposit. This is driven by a fear that they may require access to these cash sums.  Analysis suggests that in many instances, these fears are overdone with charities holding too much short term funds at the expense of achieving better longer term deposit rates.

It is critical that the management of the payment system (debtors/creditors/payments) and surplus cash flows are centralised and into one function.

Many charities approach cash flow forecasting on an ad hoc basis and err on the side of caution by holding all cash either on call or in very short term deposits. But with an interest rate differential between short term and medium term rates of between 1% and 2%, on every €1m, this equates to an opportunity loss of income of between €10,000 and €20,000.

Charities should examine historical cash flows for the previous number of years and linking in with their budgeting process, should put significant time into projecting the rate at which they may withdraw surplus funds. Regular reviews should also be conducted to ensure cash balances are running in line with budget forecasts.

Risk Management

Warren Buffet famously said that there were two golden rules of investing. Rule number one was not to lose money. Rule number two was not to forget rule number 1. In our view, capital preservation is paramount for charitable foundations. Therefore, it is important to recognise that where the capital amount is at risk, that investment returns are asymmetric. Specifically, this means that losses impact more than gains. As an example, if an investment falls in value by 50%, it has to grow by 100% just to get back to its starting position. Therefore, as Buffet says, losses matter.

Risk management however not only encompasses investment risks but should also capture operational risks with respect to the management of charitable funds. Operational risks should be reviewed regularly and procedures put in place to minimise and mitigate these risks. 

Governance

As Trustees and Directors of charitable entities, you have a fiduciary duty to ensure all funds of the charity are well managed and protected. This also includes a duty to ensure that the highest standards of practice are maintained with respect to the operational management of charitable funds. From a governance perspective, a charity should have robust processes and procedures and should annually review internal procedures and processes to ensure that funds are best protected at all times. For example, does one individual have full control over account opening and movement of funds? 

To conclude, on a day to day business, charitable entities are facing many challenges.  Whilst not often recognised, the management of surplus funds and the governance around same is a growing challenge for charities. Falling deposit rates and increased oversight all necessitate a higher duty of care for charitable entities. If in doubt, seek advice.

SECTION 4: FINANCE

5051012 Managing and Maximising Charitable Funds

Published: 05.10.2012 |
Last Updated: 15.08.2013
carmichael
carmichael
Tony Morley

Tony Morley is a Director with BDO Simpson Xavier Private Wealth Management Limited. Tony spent a large part of his career with Bank of Ireland where he managed its €35billion Euro balance sheet. His expertise is in capital markets, liquidity and balance sheet management. ...

Over the last number of years, as the banking crisis and austerity conditions in Ireland accelerated, donations to many charitable organisations fell significantly. Notwithstanding the falling donations, up until earlier this year, deposit rates at domestic banks covered under the Government guarantee held up well. In some instances, charities were able to secure deposit rates in excess of 4% and deposit income became a strong source of additional income for these charities.

In recent times the good news is that the Euro crisis has abated somewhat. On the flip side however, as the crisis abates, deposit rates have fallen significantly and are projected to fall further. Indeed, it is not implausible that short term deposit rates could fall to below 1.50% which is a long way from the hay days of 4%. In this context it is important that charities seek to maximise their surplus funds and deposit income.

Additionally, in an environment of higher regulatory oversight, Trustees and Directors of charities have a higher duty of care than they may have recognised in the past with respect to management and protection of charitable funds. 

There are many considerations that charitable entities must take account of when it comes to protection and maximisation of charitable funds. A good starting position in our view is to develop an investment policy for the charity’s surplus and investment funds.

An investment policy is an all-encompassing document that is specific to each charity.  Specifically it provides clear parameters around certain items some of  which include;

  •  Counterparty risk
  •  Liquidity and surplus cash management
  • Risk Management
  •  Governance

We discuss each of these briefly below;

Review counterparty exposures

Whilst maximisation of deposit income is critical for charitable organisations, the return of capital is more important than the return on capital. The things we took for granted in the past about the security of the global banking system, we cannot take for granted in the future. As Trustees with a fiduciary duty to protect funds, charities should ensure that they are satisfied with the security of the bank they hold their funds with.

Liquidity and surplus cash management

Our experience indicates that many charities hold most of their surplus deposits on short term deposit. This is driven by a fear that they may require access to these cash sums.  Analysis suggests that in many instances, these fears are overdone with charities holding too much short term funds at the expense of achieving better longer term deposit rates.

It is critical that the management of the payment system (debtors/creditors/payments) and surplus cash flows are centralised and into one function.

Many charities approach cash flow forecasting on an ad hoc basis and err on the side of caution by holding all cash either on call or in very short term deposits. But with an interest rate differential between short term and medium term rates of between 1% and 2%, on every €1m, this equates to an opportunity loss of income of between €10,000 and €20,000.

Charities should examine historical cash flows for the previous number of years and linking in with their budgeting process, should put significant time into projecting the rate at which they may withdraw surplus funds. Regular reviews should also be conducted to ensure cash balances are running in line with budget forecasts.

Risk Management

Warren Buffet famously said that there were two golden rules of investing. Rule number one was not to lose money. Rule number two was not to forget rule number 1. In our view, capital preservation is paramount for charitable foundations. Therefore, it is important to recognise that where the capital amount is at risk, that investment returns are asymmetric. Specifically, this means that losses impact more than gains. As an example, if an investment falls in value by 50%, it has to grow by 100% just to get back to its starting position. Therefore, as Buffet says, losses matter.

Risk management however not only encompasses investment risks but should also capture operational risks with respect to the management of charitable funds. Operational risks should be reviewed regularly and procedures put in place to minimise and mitigate these risks. 

Governance

As Trustees and Directors of charitable entities, you have a fiduciary duty to ensure all funds of the charity are well managed and protected. This also includes a duty to ensure that the highest standards of practice are maintained with respect to the operational management of charitable funds. From a governance perspective, a charity should have robust processes and procedures and should annually review internal procedures and processes to ensure that funds are best protected at all times. For example, does one individual have full control over account opening and movement of funds? 

To conclude, on a day to day business, charitable entities are facing many challenges.  Whilst not often recognised, the management of surplus funds and the governance around same is a growing challenge for charities. Falling deposit rates and increased oversight all necessitate a higher duty of care for charitable entities. If in doubt, seek advice.