Impacts of financial decisions
Higher Education Institutions Can Generate Returns on Peak Cash Flow
There are very few sure things in the higher education industry these days, but earning additional money on the cash sitting in your institution’s bank account is one of them.
Your college or university’s cash flow has significant seasonal fluctuations based on when tuition payments are received, the scheduling of financial aid or grants from federal and state governments, and the timing of large donations coming in during fundraising campaigns. If you’re school is strategic about amassing reserves from these higher revenue peaks, you can potentially earn interest at 2.2 percent on money just stashed in your account. That’s an additional $11,000 on every $500,000 that sits for one year. I call that free money.
Has your college or university forgotten about interest on cash flow?
Many institutions aren’t accustomed to earning returns on cash assets sitting idly in a bank account. Returns of 10 to 20 basis points (a basis point equals one-hundredth of 1 percent, so 100 basis points equals 1 percent, and 10 basis points equal 0.1 percent) on checking and some savings accounts have become commonplace at most financial institutions. Interest rates dropped to nearly zero and stayed there in the recession years.
As a result, our expectations of generating any kind of return on our excess cash reserves has been very low. But the interest rate has been creeping back up for the last three years. The Federal Reserve has made many incremental increases to interest rates as our economic recovery has taken hold. In 2016, the Federal Reserve started raising the federal funds rates (the interest rate banks lend money to each other on an overnight basis) from 0.20 percent to 2.40 percent, where the rate stood in May 2019.
If an additional 2.2 percent in interest seems negligible, think again. With the stock market nearing or at all-time highs, investing excess cash that is FDIC-insured with very little risk is a winning strategy to me — and certainly beats zero percent interest.
Get started with a look back
Track the monthly balances in your checking and savings accounts for the last 36 months. You can do this by looking back to your monthly bank balances and creating a simple spreadsheet listing the balances by month. Try to determine on a monthly basis how much cash you have in each of these low interest-bearing (or no interest-bearing) accounts. Multiply those balances by 2 percent and you have calculated approximately the amount of cash you are leaving on the table by doing nothing.
How we can help
CLA’s higher education professionals can help your institution evaluate ways of enhancing cash flow and generating returns money in your bank account while complying with rules and regulations that govern how you can use the money and the protocols for applying it to student accounts.
There are many online banks that carry FDIC insurance, which make these returns virtually risk-free within FDIC limits. In addition, most of these accounts have no fees. We can help you do your homework determining which bank may be right for you.