Liquidity Management, Part Two: How Much Is Enough?

(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)

Last month, we uncovered the importance of liquidity management. This month we dig deeper to help you determine the appropriate amount of operating cash for your ministry.

When it comes to cash flow, one thing is certain: day-to-day income and expenses are unsynchronized and sometimes unpredictable. However, by determining transaction, precautionary, and speculative requirements, you can forecast liquidity needs.

Transaction requirements are the funds needed to meet planned expenses, such as payroll. Start by looking at your budget for expected expenses during a specific period of time. Experts also recommend preparing a cash flow forecast by examining changes or anticipated changes to the budget and determining realistic income and expenses. Compare your forecast to actual cash reserves to ensure that adequate funds are available for transactional expenses.

Precautionary requirements are cash reserves needed to pay for unplanned expenses. Anticipate events that might impact income or expenses, then quantify appropriate reserves if such events were to occur. You can also identify the life span for capital items (such as HVAC systems, roofs, or carpet) and set aside funds to ensure cash is available when it’s time to replace them.

Speculative requirements are funds needed to pursue unplanned opportunities. With cash reserves, your ministry can respond to events such as Hurricane Katrina or hiring that key staff member who unexpectedly becomes available.

Once you’ve calculated the funds needed to meet your transaction, precautionary, and speculative requirements, then set aside that amount in cash reserves and short-term investments. If you find that you don’t have adequate cash, develop a plan to reach your target liquidity balance. You may also want to consider utilizing a line of credit to meet your liquidity needs.

Transaction, precautionary, and speculative requirements are usually based on your ministry’s history. It’s also good to talk with other ministries and financial experts, such as ECCU, to learn from their experience. Above all, resist the temptation to ignore liquidity management; it is too important to the successful fulfillment of your ministry’s mission.

For more information on this topic, check out ECCU’s white paper, Liquidity: How Much Is Enough?.

Get Connected