Commercial Activities

Ready money

Bursars spend much of their time managing an investment mix to produce the cashflow for short-term spending requirements. Jane Ayers extols the virtues of cash deposits as the key to developing schools’ income

Most governors take their financial responsibilities seriously when reviewing their investments, but do they place as much priority on monitoring their banking arrangements? Effective management of the cashflow can add significantly to overall income.

Cash is an important asset class for schools and it is set to grow stronger for the foreseeable future. Against other asset classes, cash is secure, reliable and liquid and it also provides bursars with the ability to plan with a high degree of accuracy.

Other options
Equities have outperformed cash over the longer term, but their volatility shows that there is a strong potential for capital loss in times of market weakness. Most equities are in tune with economic cycles, which historically last for periods of around five years. As we are now into our fifth year of a bull market, some commentators are speculating that stocks are overvalued and a stock market correction is due, something that appears to be happening as this publication goes to print.

Bond prices often move in the opposite direction to equities and, for the last few years, prices have decreased, causing investments to fall in value. Pension fund demand for long duration gilts and index-linked bonds means that the supply of new issues has not been competitive. These two factors mean that capital loss has been compounded by moderate income. The longer term outlook for bonds still looks steady if unexciting.

Property has been a great performer and in recent years has outperformed equities and bonds. However, there are concerns that the commercial property market could stall. Also, income from rents is less appealing in an era of rising interest rates. Yet property is an illiquid asset and not always suited to the short- to medium-term requirements of a school.

A matter of cash
Cash deposits, therefore, provide an increasingly attractive option for schools, especially in a relatively attractive era of interest rates. The current outlook for cash means it should provide at least a 2-3 per cent real return (based on Consumer Prices Index as at 14 August 2007) over the long-term. Current rates and inflation figures mean that schools can receive a 3-4 per cent real return on a fixed term deposit.

The three-month LIBID rate has risen from 4.6 per cent to 6.6 per cent in the last 12 months and, while we may be near to the peak of the current rate cycle, many commentators see rates remaining around these levels for a little while yet. LIBID is the rate at which UK and European banks make bids to attract deposits from other banks. LIBID is usually 0.125 per cent lower than LIBOR, which is a rate that is regularly quoted in the financial press and is used as a benchmark for large cash deposits.

Gang of four
Options for cash fall into four main vehicles: current accounts, instant access deposit or investment accounts, term deposits and money market funds. In all four, charges need to be offset against rates for a true comparison on returns, especially for the accounts that have more activity on them (that is, current accounts).

The sheer number of providers of current and deposit accounts make it a competitive market. As well as rates and charges, the availability of an online facility will be useful and an automatic sweep between accounts would maximise potential interest.

There are fewer fixed-term options available to charities, but there is at least one account that pays 6.69 per cent AER for a three-month term (this is the Annual Equivalent Rate and illustrates what the rate of interest would be if the interest was paid and compounded once each year. Figures correct as of 3 September 2007).

Currently in the UK there is a positive yield curve, which means there is an expectation that rates will rise in the future and longer terms will offer higher rates.

Jumping in the pool
Money market funds are also available through several fund managers. Investors’ cash is pooled and invested by the manager in the money markets, with typical charges ranging from 0.25-0.5 per cent.

Once a bursar decides on what the instant cash requirement is, he or she can allocate the rest appropriately. Composition and advanced fee money could be placed on deposit for longer periods and this would offer a higher return.

While most independent schools enjoy charitable status, bursars should consider accounts specifically for charities as these will pay interest gross automatically.

With so many competing demands on bursars’ time, managing the cashflow for current expenditure and maintaining reserves for future needs, it’s easy to forget the savings that can be made by managing cash more effectively.

This article was written 12 September 2007.

Jane Ayers is charity relations manager for CAF Charity Financial Services. Jane can be contacted onjayers@cafonline.org

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