Summary of Practices from the 2013 AFP Liquidity Study

by Dave Voris of Horizon Bank

Current interest rates are pretty lean in terms of what any corporation or Not-for-Profit can earn on investments. Yet, here I am a banker, obviously interested in building the Not-for-Profit business at Horizon, who is writing an article targeted toward Not-for-Profit investment activities. So, what am I to say and what is the Not-for-Profit community supposed to believe within the above context? Thus, I'll simply follow Horizon Bank?s tagline of Exceptional Service and Sensible Advice to discuss important issues exactly like I teach my undergraduate finance students at the Kelley School of Business on the IUPUI campus. Moreover, we also have some recent research called the 2013 Liquidity Study published by the Association of Financial Professionals to help complement my comments.

The summary conclusions for Not-for-Profit organizations as gleaned from 885 respondents in the 2013 Association of Financial Professionals? Liquidity Study may be helpful: 
- Safety of principal was reported as the driving principle of the respondents? investment strategies with 68 percent indicating that safety is the most important short-term investment objective.
- Liquidity, which may be defined as having access to cash based upon an organization?s need to meet either planned or unplanned obligations, actually experienced a material shift as an investment policy objective. In the 2013 AFP Liquidity Study, 29 percent of respondents indicated their organization?s most important cash investment policy objective is liquidity, which is an increase from 18 percent in 2011.
- Yield has remained a distant third as a short-term investment policy objective with only two percent of the respondents reporting this as the most important investment policy objective.

Additional Findings from the 2013 AFP Liquidity Study:
- About 75% of organizations have a written document defining their policies for short term investments, and about 84% of those organizations with investment policies review them on some type of regular basis.
- 50 percent of short-term investment balances are maintained in bank deposits, which include non-interest bearing deposits, time deposits, structured bank deposit products, and structured certificates of deposit.
- 74 percent of short-term investment balances are maintained in what is generally described as three safe and liquid investment instruments: bank deposits (defined above), Money Market Funds (MMFs), and U. S. Treasury securities.

This is the first in series of articles written to provide insights on making wise investment decisions and the tough choices your nonprofit is facing in this low interest rate environment.