Given the uncertainty in the global economy, it is easy to get distracted, chase emotions, and make impulsive financial decisions driven by headlines. Instead, use these planning tactics to help ensure operations are stable, reserve levels are prudent, and discipline guides any long-term investing.
1.) Focus on what you can control:
Get a good handle on operations for the next 12, then 24 months. If there is a planned budget deficit, run reports on a monthly basis to ensure losses do not unexpectedly spiral further. Any planned expenses outside of the annual budget (investments in technology, membership initiatives, etc.) should have segregated earmarked funds. Further, stress test operations by increasing expenses 20-30% and simulating the impact on net operating income (NOI). If NOI is negative with these adverse operating scenarios, then plan to keep those applicable amounts available in reserves as a back stop.
2.) Get a boost of Vitamin Cash:
Your most powerful tool is liquidity. Most people think of liquidity as cash in checking accounts, but really it includes anything that can be accessed within a few business days with little to no risk of principal loss. This includes high yield savings, money markets, and short-term treasury funds. Currently, the yield on these funds can reach 4-4.5%, providing a solid return while still maintaining that “immediate” access feature. Liquidity does two important things in times of uncertainty. The first, which everyone understands, is the ability to immediately fund unexpected expenses and/or pivot more easily. The second, arguably just as important, is it allows the organization to maintain allocations to longer term assets/investments and not be as concerned with short term bouts of volatility (often referred to as “paper losses”).
3.) If investing, planning (not luck) determines outcomes
With proper planning, an organization should have access to two to three years of adverse operating conditions in short-term reserves. Short term reserves can include money markets, certificates of deposit, and short-term bond funds often with high liquidity, low risk of principal loss, and steady income. Arguably, best practices would suggest having another two years allocated to short and intermediate-term income investments before any market-linked risk assets are introduced. Now, only funds that have longer than a five-year intended time horizon are available for long term investing. Historically, the average bear market lasts 11 months, with the longest bear market (The Great Recession of 2008/2009) lasting just under two years. If there is 5 years of organizational need available in short to intermediate term reserves (and not subject to market volatility), history suggests that longer term assets can be “left alone” and will recover given enough time in the market.
Even in adverse operation conditions, proper planning and a complimentary Investment Policy Statement (IPS) should allow for a dynamic, three-pronged approach to financial and reserve management, including creating separate silos for 1) funding immediate and/or unforeseen needs (0-2 Years), 2) earning income on funds held for the intermediate term (2-5 Years), and 3) maintaining long term investment allocations (5+ Years). Intuitively, these silos should be ranked in order of importance, funding the first category before moving on to the next. Planning in this matter also helps build consensus for financial decision-making, because it is founded on organizational needs as opposed to human emotion and impulse.
About the Author
 |
Chris McDonnell, CFP®, AIF®, EA, Principal, McDonnell Capital Management
Investment Fiduciary for Associations & Non-Profits |
