Published in the ECHO Journal, March 2011
Cash management means maximizing the use of association funds to the best possible advantage. It involves income, expenditures and investments. It includes speedier collections and improved availability. It means having the money where and when it is needed; e.g., it should be in the checking account when checks are written. It also involves spending money from the correct accounts—and for the correct purposes. Finally, it involves keeping surplus money in accounts where it can safely earn a higher yield until it is needed again.
All this is tempered by the fact that, because the money belongs to all the association members, it is wise to think conservatively in terms of the types of accounts into which it might be placed. Some association governing documents are very specific on this matter and will allow only FDIC-insured accounts in banks that are FDIC members. In associations where it is not so specified, the prudent treasurer will still take a conservative approach.
To Conduct a Simplified Cash Management Program
Your treasurer only need follow a few basic guidelines:
- Deposit the assessments into the checking account, and the money will be there when you need to write checks for regular expenses.
- Make sure the reserve portion is transferred on a routine basis into a different account that is kept for reserve funds only.
- Any surplus in checking (over and above the amount needed for expenses and reserves plus a comfortable margin) could be transferred into accounts with a higher yield; e.g., a CD account, until it is again needed in the checking account.
If your treasurer only does these three things, but religiously, then you are doing better than most associations.
However, It Is Not Difficult To Do a Better Job
Here are some ideas:
You can improve the flow of cash into the checking account both by utilizing a lockbox service at your favorite association bank and by encouraging the unit owners to sign up for an electronics funds transfer (EFT) auto-debit program. This improved cash flow could mean more interest income.
As the balances in the reserves and surplus grow, you can start thinking about bank Certificates of Deposit (CDs). As you may already know, CDs have maturity dates and if you remove the money before that date, you can pay a penalty. So you need to plan carefully and determine what amounts you will not need for, say, 3, 6 or 12 months. The benefit is that CDs pay a higher rate of interest than savings or market rate accounts. Remember also that you will want to keep the operating money CDs separated from the reserve money CDs. By the way, CDs can be for amounts as low as $10,000.
As the total funds in all accounts at your association bank approach the $250,000 mark, it is time to make a decision. What are you going to do with future funds? How do you keep more than $250,000 insured by the FDIC? There are a couple of options available. One option is to use multiple banks. This can create logistics problems for most associations although it does work for some. A second option would be to utilize your association bank’s CD placement program. In such a program, the funds will be placed by the bank, as your agent, into multiple banking institutions that are covered under the FDIC. You need to do the paperwork only one time for your agent bank; thereafter you get a monthly statement listing all the banks where your CDs are placed, the balance of each, the interest rates and maturity dates.
The Following Is a Summary of The Above Types of Accounts:
The main deposit account. Pay regular expenses from here. Transfer funds to reserve account as required. Transfer surplus to savings or market rate accounts to earn higher interest. Money is liquid and can be withdrawn at any time. FDIC insured.
Keep surplus money here on a temporary basis in order to earn higher interest. When needed in checking, transfer it back; Money is liquid and can be withdrawn at any time. FDIC insured.
Keep, in this account, that portion of the surplus which is no longer temporary. Earns higher interest than savings/MRA. Has maturity dates in the future. Penalties for early withdrawal. FDIC insured.
Use when the total funds in one bank surpass $250,000. Allows keeping more than $250,000 FDIC insured. Do this through your agent bank. Has maturity dates in the future. Penalties for early withdrawal. FDIC insured.
You can get more sophisticated than what we have described here, for example, by direct purchase of US treasury bills and bonds or by investing with securities brokers. However, this article is limited to a discussion about simplified cash management principles. Board members should discuss these additional options with their association professionals before taking actions.
Karl T. Lofthouse is a senior vice president at the Homeowner Association Banking Services Department of First Bank. He is a member of the ECHO Board of Directors.