Confidently Concentrate Your Cash
(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)
Turns out, some of the things we learn as kids do stick, like the adage, “Don’t put all your eggs in one basket.” While this may be sage advice, it does not always apply to short-term investments. If your “basket” is backed by a solid, resource-oriented relationship and years of financial stability, you may want to start stockpiling those eggs. This was one of several insights we picked up from a conversation about cash concentration with Mark Jones, cash management expert at ECCU.
MBT: Some say it can actually be a good idea to concentrate your cash. Why?
Jones: A good relationship with a financial institution is important to the long-term success of your ministry. Experts say concentrating your cash in one institution can be a wise investment in that relationship (Herb Rubenstein Consulting addresses this subject further in Strategic Thinking About Selecting and Using a Bank for Your Business or Non-profit Organization).
MBT: What issues should ministries consider when investing more than the insured amount in a single financial institution?
Jones: Preservation of principal is key. While it is common to have funds in excess of deposit insurance limits at financial institutions, periodically take a closer look at your institution to ensure its viability and safety. Meet with a representative of your institution at least annually to review its financial strength.
MBT: What should ministries specifically look for during this review?
Jones: Two factors: Asset quality and capital. Most of a financial institution’s assets are loans. While you can’t evaluate each loan, you can look at loan losses (net charge-off ratio) and delinquency. Are these within normal ranges for financial institutions? Also, you can see if they have the recommended capital ratio (capital available to cover losses from loans or operations).
MBT: What if ministries want to invest without exceeding the insured amount?
Jones: First, I encourage ministries to really assess the risk involved. If, after assessing the strength of your financial institution, your ministry still feels the need to not exceed the deposit insurance limit, there are ways to structure your accounts without having to maintain relationships with multiple financial institutions. The best approach is to utilize an account that sweeps excess balances into U.S. Treasuries daily. This allows you to maintain your full relationship with your financial institution, simplifies the management of your funds, and provides the highest level of safety available. However, the return is typically lower than money market accounts or certificates.
MBT: What additional “perks” should ministries look for when choosing a financial institution in which to concentrate their cash?
Jones: I can’t emphasize enough the importance of a personal relationship. Not only is it the basis for assuring safety and security, it is also a better foundation than rate for cash concentration decisions. The October 30, 2007, issue of Banc Investment Daily says, “Chances are your bank is all about service. If this is true, why do you even bring up rate? Why not track service?” If your banking institution over delivers on a resource-oriented relationship, cash concentration is a non-issue. They should know your ministry well enough to make personalized recommendations—such as how much liquidity you need and what percentage of income you should invest.