Is your bank the only place to hold cash? Rachel Titchen from Broadstone looks at how to use different cash vehicles and how they can reduce risk.
In today’s volatile financial landscape, it’s no wonder so many charities hold a large proportion of their assets in cash. But the big question here is, why the bank?
With increasing demand for services, tightening public sector funding, and rising operational costs, holding cash feels like a sensible option. But how cash reserves are managed is critical for charities.
As an independent investment consultant, I’ve seen a growing interest in diversifying away from traditional bank deposits to reduce risk, increase prospective returns and enhance financial resilience.
Why rethink the bank?
Economic shocks over recent years have demonstrated that even well-established household banks are not immune to idiosyncratic risks and systemic shocks.
While the Financial Services Compensation Scheme (FSCS) offers protection up to £85,000 per institution, many charities hold significantly more than this in cash. Concentrating cash deposits in a single bank exposes them to unnecessary risk.
Moreover, with inflation still a concern and interest rates fluctuating, holding large cash balances in low-interest accounts can erode purchasing power over time.
As a rule of thumb, the stronger the bank, the lower the interest rate you get for your deposits due to the perceived lower risk of those deposits and the bank’s ability to raise capital relatively cheaply.
‘Challenger Banks’, whilst not having the same brand reputation, size advantages or perceived ‘safety’ of the more established household banks in the UK, are likely to compensate depositors for taking these additional risks through higher interest rates.
Whilst some charities are beginning to consider depositing with Challenger Banks to tap into their higher rates of interest, this approach to cash management can often fall short of alternative vehicles when it comes to risk, return and liquidity.
So, what are the alternatives?
Notice Accounts and Term Deposits
These offer higher interest rates compared with instant-access accounts in exchange for locking funds away for a set period. These improved returns, however, come with associated risks. Locking away funds for a set period can often mean early withdrawals will incur penalties.
Additionally, in an environment of rapidly changing interest rate expectations, fixed returns may lag behind newer, better-paying options coming to market.
It’s also important to think about your objectives for the assets. If inflation outpaces the interest earned, the real value of your funds will reduce.
Cash Management Platforms
Cash management platforms allow organisations to access a wide range of deposit accounts from multiple banks through a single interface. By spreading deposits across multiple institutions, charities can potentially keep each deposit within the £85,000 FSCS limit, significantly reducing counterparty risk.
These platforms often negotiate preferential interest rates and automate the switching process, saving time and improving returns. Charities can set parameters for liquidity, risk, and ethical screening, ensuring alignment with their financial and ethical objectives. Most platforms also provide consolidated reporting, which simplifies governance and trustee oversight.
Money Market Funds (MMFs)
At Broadstone, MMFs are one of our preferred approaches to cash management, investing in short-term, high-quality instruments, in a highly regulated environment.
MMFs are designed to minimise risk. They invest in highly rated, short-duration assets and are subject to strict regulatory oversight. Many funds maintain a constant net asset value (NAV), typically £1 per unit, and are structured to withstand market volatility.
For charities concerned about overexposure to a single bank, MMFs offer built-in diversification across multiple issuers and sectors.
Most MMFs offer same-day or next-day access to funds, making them ideal for managing operational cash or short-term reserves. This level of liquidity is comparable to instant-access bank accounts but with the added benefit of professional oversight and risk management.
MMFs often deliver higher yields than standard bank accounts, especially when banks are slow to pass on rate increases. Because MMFs are actively managed, they can respond more dynamically to market conditions, helping to preserve and even grow the real value of cash holdings.
Balancing risk, return, and responsibility
For charities, managing cash isn’t just a financial decision — it’s a matter of stewardship. Every pound held in reserve has the potential to be invested for impact, so it’s essential to strike the right balance between safety, performance and purpose.
Risk
Understandably, charities are very often naturally risk averse. Trustees have a legal and moral duty to safeguard assets. But risk isn’t just about avoiding loss — it’s about understanding exposure.
Concentrating funds in a single bank, for example, may seem safe but could leave a charity vulnerable to institutional failure or fraud. Diversifying across institutions, asset types, and durations helps mitigate these risks.
Risks don’t just come in the form of losing capital value. Liquidity risk is the risk that the charities can’t access their funds when they need them. While some cash can be locked away for better returns, charities must ensure they have enough readily available to meet operational needs, known capital expenditures or to respond to unforeseen circumstances.
Return
While capital preservation is key, charities also need to ensure their reserves are not eroded by inflation. Low-interest bank accounts may feel secure, but they often deliver negative real returns when adjusted for inflation.
By exploring alternative options, charities can earn better rates of return without compromising liquidity or security. Even a modest increase in return can translate into more services delivered or beneficiaries supported.
Given interest rates are still relatively high in the UK compared with recent history, this is an opportune time to consider how cash can support trustees to deliver positive real returns.
Responsibility
Charities are mission-driven, and their financial decisions should reflect that. This means considering not just how much a cash vehicle earns, but how it earns it.
Are deposits funding fossil fuels or arms manufacturing? Are investments screened for environmental, social, and governance (ESG) factors? Increasingly, trustees are expected to ensure that financial practices align with the charity’s ethical stance and public expectations.
Governance and policy considerations
Before making any changes, charities should review their investment policy statements. These documents should clearly outline acceptable risk levels, liquidity requirements, and ethical considerations. Trustees may also need to seek professional advice to ensure compliance with the Charity Commission’s guidance on investment duties.
Final Thoughts
In 2025, the question isn’t just 'Where is our money?' but 'Is it working for us and our mission?'.
By exploring a broader range of cash vehicles, charities can reduce their exposure to banking risk, improve returns, and ensure that every pound is protected and purposeful.
If your charity is holding significant cash reserves in a single bank account, now is the time to reassess. As we have highlighted above, a diversified, well-governed approach to cash management can be extremely valuable to ensure risk and return is optimised appropriately.