Short-Term Cash Management

March 1, 2023 —

This article was written in advance of a summer camp industry presentation, which you can watch here. Read about QuantStreet’s camp services here.

Overview

In late-winter and early-spring many camps find themselves in a cash-rich position, as camper tuition has been charged, while most of the expenses of running camp do not materialize until early summer.

How should camps manage this cash-rich position in the several months before camp begins?

One option, and likely the one pursued by most camps, is to just keep the money in your bank’s saving account. While certainly a reasonable option, the downside of this approach is that your bank may be paying you close to zero interest on your money. For example, if you bank with Bank of America, you are likely earning between 0.01% and 0.04% on your business savings account.

While this would not have been an issue in prior years, with interest rates now much higher, there may be better alternatives. For example, if you can earn a 2% annual interest rate on your savings and you keep $500,000 invested at this rate for three months (March, April, and May), you will earn $2,500 in interest, which is a lot better than zero.

Any alternative money management option must satisfy the following three criteria to make it a viable plan:

Liquidity. You must be able to withdraw the money in time for the start of your camp-related expenses.
Safety. The investment vehicle you are using should be as safe as a savings account at a high-quality bank.
Cost effectiveness. There shouldn’t be any hidden fees that will eat into the additional interest earnings.

With these three requirements in mind, let us consider other investment options.

Higher Interest Savings Accounts

You should first find out what is happening with your existing business banking account. For example, your own bank may offer a higher interest-rate option, especially if you are willing to lock up the money for three months. So part of the solution may be as simple as contacting your banker and asking about alternative options at your existing institution. This one phone call may generate a few extra thousand dollars for your camp.

If that doesn’t work, you can look at other, large banks to see if they may offer a more attractive option. For example, HSBC is currently running a promotion offering attractive one-time savings rates. Wells Fargo offers a menu of options, ranging from saving accounts to certificates of deposit (CDs) which may give you an advantageous alternative to your current bank. Similarly, Bank of America, Chase, and other major banks may be able to provide you with something better than zero returns — even if they don’t advertise such a product — if you just ask them about your options.

When deciding on whether opening a savings account at another bank is worth it, you should first find out the terms associated with that savings account.

Are there other fees?
Are there withdrawal restrictions of any kind?
Are your deposits FDIC insured up to the $250,000 limit?
Does the new account satisfy the three requirements (liquidity, safety, cost effectiveness) we listed at the outset?

You should also do due diligence on the bank. A good place for this is to sign up for a free account with one of the major credit rating agencies, like Moody’s or S&P Global and then download their free research reports about your particular bank to make sure that your bank is sufficiently creditworthy.

A caveat. You can find banks offering higher interest rate business savings accounts by simply searching online. This website from Forbes is entitled “Best Business Savings Accounts.” CNBC has a similar website with a list of their preferred small business banks. These banks tend to be smaller, regional banks so make sure you do your due diligence before investing with them.

The downside of switching banks, of course, is that this might be quite onerous because you already have a relationship with your existing bank and have configured their website to pay all your vendors. So if your bank won’t budge and increase your savings rate, do you have other options?

Money Market Funds

Another popular cash management tool for businesses comes in the form of money market funds. Money market funds are set up as mutual funds, and invest in short-term, very liquid securities with the intent of never losing any of the investments’ principal amount while passing through the interest earned by the fund’s investments to its clients. There are many types of money market funds, but the safest are ones that invest only in U.S. Treasury (or closely related) securities.

One such fund is the Vanguard Treasury Money Market Fund (called VUSXX). Here is how Vanguard describes the fund on its website:

“Vanguard Treasury Money Market Fund, which invests primarily in U.S. Treasury securities, seeks to provide current income and preserve shareholders’ principal investment by maintaining a share price of $1. This fund at a minimum invests 80% of the assets in debt issued directly by the government in the form of Treasury bills and in repurchase agreements fully collateralized by U.S. Treasury securities. As a government money market fund, this fund is required to invest at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered by Vanguard. Although the fund invests primarily in short-term U.S. Treasury bills, the amount of income that a shareholder may receive will be largely dependent on the current interest rate environment. Investors who have short-term savings goals and want the added security of investing in a fund in which the majority of the underlying securities are backed by the full faith and credit of the U.S. government may wish to consider this option.”

Importantly, unlike an FDIC-insured savings account, money market funds are not insured by the U.S. government. But since Treasury money market funds invest in a very safe pool of U.S. government and related securities, they are safe despite this lack of explicit insurance. The following chart shows the share price of VUSXX over the last thirty years, a time period which includes the 2000-2001 market crash associated with the bursting of the dot-com bubble, the global financial crisis of 2008 and 2009, and the 2020 COVID shock. As you can see, the fund never faltered in its objective of maintaining a $1 share price. The fund’s expense ratio is a very reasonable 0.09% of assets under management, and its current yield (the rate of return that its investors will earn) is an impressive 4.55%.

Source: Bloomberg

An investment in this fund would work like this. With $500,000 you would buy 500,000 shares of the fund at a price of $1 per share. If you invest when the fund has a 4.55% yield, over the next three months you will earn approximately $500,000 x 4.55% x ¼ = $5,687.50 in interest (approximate because the 4.55% yield of the fund may change slightly over time). When you need the money back in three months, you will sell your 500,000 shares of the fund to recoup your $500,000 investment.

There is a very small risk of the fund “breaking the buck,” which means that the share price would fall below $1 when you choose to sell the fund. For example, if the share price fell to $0.99, you would only get back $495,000 from selling your 500,000 shares. This has never happened with VUSXX over its entire life (as the above chart shows), but it is a small tail risk.[FN 1] For this reason, if you choose to go down the money market route, perhaps it is prudent to invest only a portion of your funds in the money market fund and keep the rest in your bank account, to mitigate even further the small risk of the fund breaking the buck. For example, you can keep $250,000 in your bank, since that is the FDIC insurance cap, and invest the remainder in a U.S. government money market fund.

There are other money market funds that invest in a similarly safe pool of assets. Fidelity’s Treasury Only Money Market Fund (FDLXX) is one example. However, the yield on the Fidelity fund is currently only 3.99%, lower than that of the Vanguard fund. The main reason for this is that the Fidelity fund charges a 0.42% management fee, which eats into some of its interest earnings. The other reason is that the Fidelity fund, by not currently investing in repurchase agreements, has an ever-so-slightly safer portfolio relative to the Vanguard fund. Like the Vanguard fund, FDLXX has only ever traded at its intended $1 share price.

As with all other investments, before putting your camp’s money into a money market fund, make sure to talk to an account representative at the firm you choose and ask them about all possible contingencies:

Will the fund group ever suspend redemptions which may prevent you from withdrawing the money at the time that you need it?
Are there any upfront purchase or sale charges associated with the money market fund?
Is the money market fund investing only in U.S. government and related securities?
Has the fund ever broken the buck, i.e., fallen below the $1 share price target?
What management fees does the fund charge?

Summary

Your primary goal as a camp operator is to invest your camp’s tuition revenue while maintaining the liquidity, safety, and cost effectiveness of the investment. Taking into account these considerations, you can take some simple and safe steps to meaningfully increase the revenue you can earn on your tuition dollars. By simply calling your bank or holding part of your money in a slightly different type of account, you can gain the equivalent revenue of a couple additional campers enrolling. Before pursuing any of these options, make sure to do all the proper due diligence to confirm the investment product is a fit for your objectives.

Footnote

[FN 1] One notable example of a money market fund breaking the buck happened during the global financial crisis of 2008-2009. A large money market fund called the Reserve Primary Fund broke the buck and declared a per share value of $0.97 in September of 2008, following the Lehman Brothers bankruptcy. Rather than investing only in U.S. government and related securities, the Reserve Primary Fund invested heavily in asset-backed and financial-sector commercial paper, a type of short-term corporate bond. After the Lehman bankruptcy, investors became very concerned about the creditworthiness of the Reserve Primary Fund’s holdings. During this time, VUSXX maintained its targeted $1 per share price.

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