Educating your board about optimizing cash management

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Many hospitals and health care organizations have significant opportunities to optimize their cash management strategies. Especially if you expect rates to come down, now is the time to educate your board on segmentation strategies.

This article provides a framework for educating your board about cash management strategies, with particular emphasis on short- to mid-term allocations — where many organizations remain significantly underinvested.

The hidden opportunity

Steve Backus
_{© Johnson Financial Group}

For years, near-zero interest rates made it reasonable to keep cash in traditional bank accounts like checking and savings. But the landscape has changed dramatically, and many hospitals and health care organizations continue to leave significant money on the table. Consider this real-world example:

• A senior-living community was facing an operational shortfall due to increasing staff costs, particularly for traveling and contract nursing.
• In collaboration with the organization’s leaders, we reviewed the financials and identified approximately $15 million in bank accounts earning less than 1% interest.
• While prudent to set aside funds due to an uncertain operating environment, the specific allocation wasn’t well segmented.
• We suggested moving the $15 million into higher-yielding accounts (money market, individual fixed-income securities, and treasury bonds/bills generating approximately 5% annually and time-matched to their needs). The funds then generated $750,000 in additional income — helping to cover the operational shortfall.

Health care organizations are often used to working with banks as they manage their finances. In general, banks won’t be proactive and come to leadership or the board and suggest moving funds into higher-yielding instruments. That’s one reason why board education is so important.

A three-bucket framework

In my experience, a simple, three-bucket framework is most effective for board education:

Bucket 1: operational cash (zero to 12 months)

This represents funds needed for immediate operations — say, six months of payroll plus anticipated capital expenditures. Here, bank accounts and money markets are likely most appropriate.

Bucket 2: short/intermediate investments (12 to 36 months)

This is where the greatest opportunity often lies. For funds earmarked for upcoming capital expenses or additional operational security, consider individual fixed-income securities or ultrashort fixed-income funds. With yields between 4% and 4.5%, these investments can provide substantial returns without the volatility of longer-term investments.

If you know you need to spend in six months, money markets may make sense. But if your timeline is 12 to 36 months, it may be better to lock in a rate — given the potential for rates to come down. The key educational point is balancing liquidity needs against interest rate risk.

We suggest linking investment accounts in this bucket to your bank account for ease of transfer.

Bucket 3: long-term investments

These are funds that won’t be needed for three or more years and can be invested according to traditional long-term strategies aligned with your organization’s investment policy statement. This portion likely already receives significant attention from your board.

Integrating this framework into your investment policy statement

One effective approach is to expand your investment policy statement (IPS) to include specific guidelines for each bucket. Boards — and even financial leaders — tend to think about the IPS as just for long-term investments.

However, in our experience over recent years, the majority of our work isn’t changing long-term allocation — it’s adding another section to the IPS about handling shorter-term cash.

Your expanded IPS should outline the following:

• How cash should be segmented based on time horizons
• Appropriate investment vehicles for each segment
• Risk parameters and performance benchmarks
• Decision-making processes for moving between buckets

Effective board communication strategies

When presenting this framework to your board, emphasize mission impact, use concrete examples and be sure to acknowledge board expertise. Find opportunities to provide ongoing education as a part of regular meetings.

By implementing this framework, you can help your board understand that prudent cash management is about segmentation and time-matching. In today’s environment, this approach could generate significant additional income to support your organization’s mission while maintaining necessary liquidity and keeping financial risk low.

Steve Backus is an SVP institutional client adviser at Johnson Financial Group, focusing on assisting not-for-profit organizations with their investment needs. He provides important client and portfolio management services to help ensure the highest level of client satisfaction.