It’s already happening! Banks and advisors are setting expectations with clients for more upcoming rate cuts by the Federal Reserve. These will lead to lower deposit rates and yields on short-term cash for next year.
As mentioned in prior blogs, you shouldn’t fall into the trap that lower interest rates mean that the value of cash cannot be a valuable revenue-generating asset.
A number of public and higher-Ed institutions keep more cash than necessary on the sidelines, so liquid that the cash becomes dormant. Doing so leads to a lost opportunity in creating or preserving interest income.
There are three steps you should take to make more interest income on your cash, even in a declining interest-rate environment.
First, have a liquidity analysis performed by three+one®. Keep in mind that a liquidity analysis is far different from a cash flow analysis. Looking at all financial transactions from an entity’s perspective—and comparing each transaction that flows through its financial institutions—will lead to valuable data for all parties involved. The more information you have when you actually need cash, not just when you think you need it, will create a level of confidence as you seek to put all cash to work.
Second, the time horizon of short-term cash will allow you to understand the value of cash in the marketplace. All cash has value, whether for a day or for two or more years. Having the confidence to make the decision is a matter of having the necessary information at hand. Our proprietary cashvest® platform can provide you with all the data you need to manage your cash, while also providing a road map to your financial institutions, with sound advice in the management of deposits or investments.
Third, trust the data. While short-term interest rates may rise or fall, the ability to leverage the time value of your cash will allow you to capture or preserve interest income on all cash. In doing so, you should have confidence in what the data is telling you. The ability to have accurate information at your fingertips will allow you to make timely investment decisions with your financial institutions, while always having access to cash when it is needed.
This is the time to start preparing for next year. Let our cashvest® platform provide you with the accurate liquidity data necessary to put all of your cash to work. You’ll be taking advantage of the time value of all cash and preserving your interest income.
Having the right data will enable you to instruct your financial institutions on the steps you plan to take to make more interest income next year. That’s better than having them tell you to expect lower-interest earnings.
cashvest® by three+one® is here to help you demonstrate that kind of confidence.
Across the country, local public entities find themselves in the same predicament: trying to do more with fewer resources, smaller staffs, and greater demands.
In today’s environment, these issues are virtually universal, in cities, towns, villages, and school districts within a given county—and adjacent counties.
On top of these constraints is a steady stream of unfunded federal and state mandates that public entities must implement, with ever fewer dollars to cover day-to-day overhead expenses.
It should come as no surprise that more and more entities are looking to work together to eliminate duplication of services and reduce unnecessary overhead. As a result, shared-services initiatives are gaining popularity, ranging from public works, public safety, self-insured healthcare plans, and cooperative purchasing programs.
The ability to join forces can have an immediate and beneficial financial impact. The one impediment is jurisdiction of control. Entities involved in sharing services should have a long-term perspective of outcome and address this clearly upfront—and in writing.
The need to consider or expand shared services may not be desirable, but rather an absolute necessity to survive. This is especially true for smaller entities within larger jurisdictions. In the minds of taxpayers, a proper business attitude is to be applied, rather than an emotional wrestling match over control.
Under a shared-services agreement, the concern of lost identity should not be raised; the initiative is a joint effort in providing/receiving services for the participants’ mutual benefit. In general, the initiatives should focus on saving money and/or generating revenue.
Here are 5 financial shared-service initiatives to consider:
1. Conducting a universal banking services Request for Proposal. A banking RFP would create a large volume of buying power to use in negotiating competitive pricing on bank fees and deposit rates. A collaboration like this could include villages, towns, cities, school districts, and the county government, all at once. The end result could lead to hundreds of thousands—if not millions—of dollars in savings and or additional interest income. rfpPrep® by three+one® is the first-ever electronic banking RFP (Request for Proposal) service, entirely online and specifically designed to facilitate the bidding of banking services. Visit our rfpPrep site for more resources.
2. County governments can be a source of purchasing the short-term paper of related entities as they come to market. As local villages, towns, and school districts issue Bond Anticipation Notes (BAN) or Tax Anticipations Notes (TAN), a county could be a bidder of such notes, as allowed by legal statutes, for investment purposes. As such, the county can be an additional bidder, helping to lead to lower rates and greater competitive pricing on cash for investment.
3. Counties can provide additional resources and expertise through their finance offices in helping smaller local entities identify and manage their cash. It would still be expected that associated entities would control their cash, but alleviate the stress associated in identifying and investing cash.
4. Combining technology efforts can be effective and beneficial both in financial and banking transactions, especially in the flow and protection of collections and payments.
5. Finally, consider consolidating tax collection. In the future, all tax collections will be automated. The need to have a counter or have the control of check collection will become obsolete. Having one point of contact for tax payment and options payment can lead to major personnel and banking cost savings.
Sharing services can be pathway to strengthening the financial well-being of all those involved. Let three+one help you in setting up and managing your shared-services initiatives. What may seem as a major undertaking can be simplified with through our proprietary liquidity analysis and modeling capabilities.
As always, our mission is to help public entities to do more in serving their communities.
It is my expectation that average earnings on short-term cash in 2020 will range between 1.50% to 2.00%.
With short-term rates currently hovering just above 2.0% and recent indications by the Federal Reserve to lower short-term rates, one would expect lower budget interest earning projections for 2020. However, that doesn’t need to be the case.
A majority of public and higher Ed institutions continue to keep many levels of cash on the sidelines for “just-in-case” circumstances. For them, that means leaving sizable balances in low interest-bearing accounts.
Here are three steps you can take now to preserve and increase your interest income earnings for next year:
1. Perform a liquidity analysis around all your cash. This is far different from a cash-flow analysis. A liquidity analysis not only looks at the ebbs and flows of a month’s highs and lows of cash, but also includes the float of every dollar as it relates to actual daily transactions that occur all across your entity and your financial institutions . By monitoring your liquidity, the ability to pay your bills while also investing all other cash will allow you to maximize the value of all of your dollars, not just some of them.
2. Be aware that the valueof cash in the marketplace depends on the amount of time you have on your cash. Currently, money invested for 30 days is receiving higher rates than that invested for 90 days or longer. However, this can change, so having an active dialogue with your financial providers to establish an investment strategy is important. In the past eight months, there have been a couple of times we’ve seen 12-month rates jump up; they allowed those who paid attention to lock in higher rates. For your bank or investment advisor to take advantage of such opportunities relies on your ready response, always knowing what monies can be put to work, and the necessary approval processes are in place to implement upon their specific recommendations.
3. Remember that this is also good time to keep an open dialogue with your banker(s). Proactive involvement with your bank(s) will help you strategize against any reactive rate moves the bank could make in a changing rate environment.
If you don’t where to start – or don’t have the time or resources – let the team at three+one® help. With the support of our proprietary liquidity analysis and data, we can gauge critical time horizon on all your cash. That will enable you to capture the highest marketplace value for your cash and help preserve and increase your income this year and all next year.
Though it appears that rates will be slightly lower for the next budget year, that doesn’t mean you have to lower your interest-earnings outlook. It just means you need to know what tools are out there to help you make the most of your cash on hand.
Your 2020 budget can reflect an increase in interest earnings through a proactive management style and the liquidity data of three+one®.