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ICGFM International Conference

Cash Management Workshop


May 20, 2010
ICGFM Cash Management Workshop

– Opening and Introductions


– What is Cash Management?
– Organization and Communication
– Treasury Single Account and Banking Relations
– Debt and Investment Policies
– Cash Flow Forecasting
– Managing Cash Inflows and Outflows
– Q&A
2
What is Cash Management?
What is Cash Management?

– Definition
– Objectives
– Importance
– What It Is NOT
– Results of a Poorly Defined Program
– Components of a Strong Program

4
Definition of Cash Management

Having the RIGHT money in the RIGHT


place at the RIGHT time to meet
Government obligations in the most cost
effective way.

“Government Cash and Treasury Management Reform” by Ian Storkley, ADB


The Government Brief, Issue 7-2003

5
Objectives of Cash Management

• Cash Mobilization:
– Get the cash in as fast as you can

• Controlled Disbursement:
– Release the cash at the last possible moment

• Investment Program:
– Do something worthwhile with the cash in the
meantime
“Best Practices in Treasury Management” by Nicholas Greifer and Jeffrey Vieceli,
Government Finance Review, April 2000
6
Importance of Cash Management

• Safeguard cash and investment assets

• Minimize the volume of idle balances

• Match the timing of cash inflows and cash


outflows

7
Importance of Cash Management

• Reduce operational risk by increasing the


certainty that payments are made and
receipts are deposited on time

• Reduce the cost of borrowing, minimize


transaction costs, increase investment
income

8
Cash Management is NOT

Cash Management is NOT a


substitute for:

– Poor budgeting decisions

– Spending in excess of budget authority

9
Cash Management is NOT
• Cash management is NOT budget or
accounting control

• Budget and accounting controls (quotas and


commitments) are intended primarily to ensure
budget users’ compliance with budget
• The intent of cash management is to manage
the government’s cash in a cost-effective way
that minimizes risk

10
Cash Management is NOT

• Many countries control their budgets and


facilitate their accounting through the release
of funds through various cash accounts

• Budget revenue and expenditure control must


be DE-LINKED from cash to meet cash
management objectives

11
Results of a Poorly Defined Program

• Proliferation of both private and central bank


accounts which are difficult to manage

• Restrictions on the use of cash within those


bank accounts resulting in unnecessary
borrowing or lost investment income

• Lack of responsibility over idle balances or ill-


timed payments

12
Results of a Poorly Defined Program

• Inefficient and expensive choices about how short-falls are funded

• Inappropriate or non-existent information for projecting short-falls or


excess balances

• Isolation of the Treasury from information on cash balances and


control of those balances

• Cash rationing occurs

13
Results of a Poorly Defined Program

• Inability to project cash inflows and outflows

• Volatility in the government cash balance which


can thwart the central bank’s monetary policy

• Expensive banking charges coupled with poor


or non-existent banking services

14
Components of a Strong Program

All of the following components are


essential for a strong cash management
program.

15
Components of a Strong Program
• Written Policies and Procedures
– Responsibilities
– Banking
– Investments
– Cash Handling, Collections and Deposits
– Disbursements
– Cash Forecasting

16
Components of a Strong Program
• Organization
– Cash Management Unit within Treasury has
primary responsibility
– One Cash Management professional
– Responsibilities of all players (Treasury,
spending ministries, revenue generating
ministries) are clearly defined

17
Components of a Strong Program
• Banking
– Strong banking relationships are established
with the Treasury, NOT THE BANKS, as the
driver

– Treasury is the owner and controls ALL


government bank accounts
– Number of bank accounts is kept to a bare
minimum and cash balances are available to
Treasury for disbursement
18
Components of a Strong Program
• Banking
– There are written agreements with all banks including central bank

– The government earns interest on all its available cash balances and
in turn pays for all the banking services it receives

– Formal selection of banks through a tender process based on


security, transaction costs, interest rates and other services

19
Components of a Strong Program
• Banking
– Banks perform the following types of services:
• Sweep funds at the end of day

• Provide receipt, disbursement and cash balance information


electronically in real time

• Electronically transmit payroll and disbursements

• Electronically interface data from banking system to cash


management / treasury software

20
Components of a Strong Program
• Receipts and Deposits
– Collections are made through the banking
system
– Deposits are available for disbursement or
investment no later than the next day
– Deposit accounts are swept daily to central
government accounts

21
Components of a Strong Program
• Disbursements
– Treasury performs a centralized payment function
– Payments are only made on the dates payments are
due
– Payments to vendors and employees are made
electronically
– Cash disbursements are eliminated if possible or at
least minimized

22
Components of a Strong Program
• Disbursements
– Ministries and agencies are penalized for making
commitments outside of their budget authority
– Disbursement timing matches timing of cash
inflows (spending plans)
– Monies are only transferred to disbursing
accounts when payments are made

23
Components of a Strong Program

• Cash Flow Forecasting


– Annual, monthly, weekly and daily estimates of:
• Receipts
• Disbursements
• Cash Balances
– Performed daily on a 12-month roll-forward basis
– High rate of accuracy and predictability
– Follow-up and analysis on variances

24
Components of a Strong Program

• Be Proactive
– Take action when projections indicate
larger variances than expected

25
Organization and Communication
Organization and Communication

– Cash Management Unit

– Flow of Information

– Cash Management Committee

27
Cash Management Unit
• Responsibilities
– Forecasts, monitors and tracks cash flows
– Prepares cash flow reports and identifies
and reports on variances
– Provides leadership and direction to all
ministries / departments on cash
management issues
– Develops and maintains cash management
policies and procedures
28
Cash Management Unit
• Responsibilities
– Recommends improvements in all aspects
of cash management to strengthen internal
controls and enhance available cash
balances

– Prepares risk and cost benefit analyses

– Maintains banking relationships

29
Cash Management Unit

• Qualifications of a Cash Manager


– Degree in finance, accounting, economics
– Excellent communication skills, both
written and verbal
– Ability to establish positive working
relationships with internal and external key
players
– Ability to discern trends and identify risks

30
Cash Management Unit

• Qualifications of a Cash Manager


– Ability to sell new ideas
– Strong analytical skills:
• Variance analysis
• Business processes
• Cost benefit analysis

31
Flow of Information
Actual
Actual
Inflows
Inflows
and
Borrowin and Investme
Borrowin Outflows
Outflows Investme
ggPlan nt
ntPlan
Plan
Plan

Updated
Updated Cash
Cash Revenue
Revenue
Economi
Economi
cc Manage
Manage
Forecast
Forecast
ss
Forecast
Forecast rr

Liquidity
Liquidity
Managem Spendin
Spendin
Managem ggPlan
ent
ent Cash Plan
Cash
Balances
Balances
32
Flow of Information
• Key Information Sources
– Banking System (Commercial and / or Central
Bank)
– Accounting System
– Budget Spending Quotas, Plans and
Amendments
– Reports Monitoring Budget Execution
– Macro-Economic Forecasts

33
Flow of Information
• Key Information Sources
– Major Budget Institutions (Exception
Reporting)
– Revenue Institutions (Exception Reporting)
– Debt Unit

34
Cash Management Committee
• Members
– Macro-Economic Forecasting Unit
– Revenue Agencies
– Major Budget Agencies
– Central Bank
– MOF, Budget
– MOF, Debt
– Treasurer

35
Cash Management Committee
• Purpose
– Review forecasts
– Agreements on initial forecasts and changes
(macro-economic statistics, budget
amendments, cash flow projections)
– Recommend short-term action
– Establish performance goals
– Recommend improvements to cash
management practices
36
Treasury Single Account and
Banking Relations
Treasury Single Account

Treasury Single Account (TSA):


a series of linked bank accounts through
which all government transactions flow

38
Treasury Single Account
• Active or Centralized TSA
– Requests for payment are sent to the Treasury for
payment
– Most efficient both from a cash management and
expenditure control perspective
– Avoids borrowing and additional interest charges
to finance the expenditures of some agencies
while other agencies keep idle balances in their
bank accounts

39
Treasury Single Account
• Passive TSA
– Multiple bank accounts in the Central or private banks
controlled by Treasury but managed by spending
agencies

– Payments made directly by spending agencies

– The Treasury sets cash limits but does not control


individual transactions

– Accounts cleared every day and balances transferred to


the central Treasury account
40
Treasury Single Account
• Passive TSA
– Avoid pre-funding of ministry accounts
– Incentive structures:
• UK - spending agencies are penalized for
drawing cash in advance of need

41
Treasury Single Account
• Passive TSA
– Incentive structures:
• New Zealand - departments negotiate annual cash
requirements and pay penalties if they run out of
cash or earn interest on their surplus funds. The
ministry of finance sweeps department bank
accounts each evening and invests the surplus in
the overnight money market.

42
Treasury Single Account

• Combination of Centralized and


Passive TSA
– Centralize Large Payments
– Decentralize Small Payments

43
Treasury Single Account
• Banking Relationships
– Establish strong banking relationships with
the Government as the driver
– Formal agreement with the central bank
– The government should earn interest on all its
deposits and in turn should pay for all the
banking services it receives

44
Treasury Single Account
• Banking Relationships
– Formal selection of commercial banks through
a tender process. Evaluation criteria should
be based on:
• Security
• Ability to link the central bank
• Ability to sweep funds at the end of day
• Interest and transaction rates
• Ability to provide information electronically in on-
line, real time and other services.

45
Moving to Centralized Cash
(Steps - in theory)

Functional Administrative
• Identify bank accounts • Amend laws and regulations
• Close unnecessary accounts • Revise reporting templates
• Structure remaining accounts • Draft procedures manuals
into pyramid style • Revise accounting processes
• Re-engineer disbursement • Renegotiate banking
process arrangements
• Re-engineer revenue process
• Sequence transfer of cash
balances
• Establish cash forecasting
team

46
Challenges
• Typical issues in developing economies
– Institutional malaise
– Culture change
– Entitlements – Supplements/Per Diem
• Absence of modern banking system

47
Challenges
• Absence of reliable information
– No list of bank accounts
• Lack of Infrastructure
– For both banking and accounting systems
• Lack of Human Capacity
• View of Imprest Accounts at
Entitlement

48
RFPs for Banking Services -
Components
• Document the Current Environment
• Develop the RFP
• Evaluate the Bank Responses
• Bank Presentations and Bank Visits
• Develop Overall Implementation and
Obtain Approval

49
Step 1 – Document the
current environment

Banking Needs Assessment - The first


step is a review of the current banking
environment. The goal is to establish a
firm understanding of what can and
should be considered as requirements
in the targeted banking structure.

50
Step 1 – Document the
current environment
Major Tasks
• Prepare a customized packet for each area of
your treasury organization regarding their current
banking services
• Request current bank account analyses for all
banks and accounts
• Design a checklist determining necessary
information to gather from each function

51
Step 1 – Document the
current environment
Results
• Understand the current environment for
banking services
• Understand the key business and technical
requirements
• Identify potential service gaps and
improvement opportunities

52
Step 2 – Develop the RFP

RFP Formulation and Distribution - The


second step is the development of the
RFP based on the information gathered
in Step 1.

53
Step 2 – Develop the RFP
Major Tasks
• Develop an overall vision for banking structure and
services required
• Analyze current bank account structures and providers
• Inventory and assess specific concerns and issues for
bank service requirements
• Determine list of banks to be included in RFP process
• Develop the customized RFP for those selected banks
and issue RFP

54
Step 2 – Develop the RFP
Results
• Conceptual design of the future banking
structure
• Communication & recommendations for
preferred services

55
Step 3 - RFP Evaluation

The third step focuses on evaluating and


prioritizing the bank responses to
determine which banks can realistically
be considered to move from the current
to the target environment.

56
Step 3 - RFP Evaluation
Major Tasks
• Customize RFP evaluation tool for bank services
• Conduct quantitative analysis of RFP responses
• Score bank RFP results on a weighted basis
• Perform additional technical and qualitative analysis on
bank RFPs
• Complete cost analysis on proposed pricing using the
estimated volumes
• Determine the short list of banks to participate in the
presentation phase

57
Step 3 - RFP Evaluation
Results
• Banks are objectively prioritized based on
their capabilities and responses
• Recommended banks identified to
participate in bank presentations and visits

58
Step 4 - Finalist Presentations
and On-Site Tours
The fourth step is the research and
validation to ensure that the bank can
meet the current and future
requirements, as stated in their
response, at a level of satisfaction to
your needs.

59
Step 4 - Finalist Presentations
and On-Site Tours
Major Tasks
• Notify the banks that did not make the final cut
• Contact the short list of banks that made the final cut to let
them know of next steps and give them advance notice
• Develop the desired presentation format/script, and
provide this to the banks
• Schedule the presentations and bank visits
• Evaluate the demonstrations formally and debrief after
each meeting
• Conduct on-site tours of finalist banks as necessary

60
Step 4 - Finalist Presentations
and On-Site Tours
Results
• Validation of bank capabilities with regard
to your requirements

61
Step 5 - Bank Selection and
Plan Development
The fifth step is the selection of the bank
and development of an overall plan
which will consider the key tasks, the
staffing / skill requirements, timeframes
and estimated costs required as next
steps to move towards the targeted
environment.

62
Step 5 - Bank Selection and
Plan Development
Major Tasks
• Select the preferred bank(s)
• Develop overall implementation plan which
includes:
–Key project tasks and dependencies
–Staffing and skill set requirements
–Timeframes
–Key deliverables

63
Step 5 - Bank Selection and
Plan Development
Results
• Documented and agreed upon
implementation plan for the conceptual
design of the preferred banking structure
• Approval to move forward with the
implementation

64
Debt and Investment Policies
Debt and Investment Policies
• Tying Debt Issuances to Forecasts
• Short-Term vs. Long-Term Debt
• Assumption of Investment Risk
• Ensuring Investments Are Secure
• Examples of US State and Local
Government Investment Policies

66
Debt and Investment Policies
Importance of Tying Debt Issuances to
Forecasts
– Cash Flow Forecasts
• Length of Debt
– Match maturity date to sources of repayment
– Match service dates to sources
– Return Forecasts
• Debt “proceeds” must be invested
– Match return on investment to interest of bonds

67
Debt and Investment Policies
Long Term Debt
• Municipal Bonds
– Bonds issued by any of the 50 states, the territories and their
subdivisions, counties, cities, towns, villages and school districts,
agencies, such as authorities and special districts created by the states,
and certain federally sponsored agencies such as local housing
authorities.
– Historically, the interest paid on theses bonds has been exempt from
federal income taxes and is generally exempt from state and local taxes
in the state of issuance.
– Approximately $1.3 trillion municipal bonds outstanding.
– Generate about $50 billion tax-free interest income each year.
– Can be 20 years, or for the life of the project.

68
Debt and Investment Policies

Short Term Debt


• Municipal Notes.
– Short-term municipal obligations, generally maturing in one year
or less.

– Common types are (1) bond anticipation notes (BANs), (2)


revenue anticipation notes (RANs), (3) tax anticipation notes
(TANs), (4) grant anticipation notes, (5) project notes, and (6)
construction loan notes

69
Debt and Investment Policies
Suggestions for Debt Policies
1. Issuance Guidelines
• Town will strive to maintain/improve its bond and/or credit rating to
minimize borrowing costs and preserve access to Credit.
• Annual Debt service costs not to exceed 8% of Town’s Operating
expenditures at the time obligation incurred.
• Total remaining balances of Long Term Debt obligations not to exceed
1.5% of Town’s net assessable base at the time the obligation is
incurred.
2. Allowable Investments for Proceeds
3. Statements on Projects
4. Refinancing
5. Glossary of terms

70
Debt and Investment Policies
Importance of Tying Investments to Forecasts
– Cash Flow Forecasts
• Length of investment
– Match maturity date to needs
– Match maturity date to potential new investments
– Forecast on Estimated Returns
• Benchmark
– Blending your overall return to match your benchmark
» Average rate of return

71
Debt and Investment Policies
Ensuring Investments are Secure
• Follow the code of your state or country, then be conservative
• Be very specific in your investment policy on what can and
cannot be used (examples on the next few pages)
• Investment policy needs to have oversight
• Constantly monitor information
• Monitor investment report daily
• Diversify
• And…..

72
Debt and Investment Policies
• Assumption of Investment Risk – Not just earning the
highest return but protecting capital
– Diversify Portfolio
• Term
• Type
• Include details in your Investment Policy
• Investment Report
• Types of Investment Risk
– Internal vs. External
• Suggestions to Mitigate Risk
– Investment Policy
– Investment Monitor

73
Debt and Investment Policies
Investment Policy Example
1. Objective – typically safety, liquidity, yield.
2. Roles – who is responsible for investing the funds (ultimately)
3. Investment Monitor
4. Finance Board
5. Ethics and Conflict of Interest
6. Internal Controls
7. Uses for Investment Proceeds
8. Benchmarks
9. Purchasing Investments – Mechanics
10. Allowable Investments
11. Report Components
12. Glossary of terms
74
Debt and Investment Policies
Class Length % of Total
Portfolio
Stocks, bonds, and other 60 months or less 75%
evidences of indebtedness
of the Commonwealth of
VA
Stocks, bonds, notes and 60 months or less 100%
other evidences of
indebtedness of the United
States
Prime Quality Commercial 270 days or less 35% with a 5% per issuer
Paper limit

Note – Include these parameters in your investment report.

75
Debt and Investment Policies
Debt Policy Links - Links
http://www.sykesville.net/minutes/DEBT_POLICY09.pdf
http://www.arlingtonva.us/Departments/ManagementAndFinance/Bond/PFM%20Response%20to
%20Debt.pdf
http://www.co.hanover.va.us/finance/adopted-04/debt_policy.pdf
Municipal Bond Terms - Links
http://emuni.com/glossary.php
Investment Policy - Links
http://www.loudoun.gov/controls/speerio/resources/RenderContent.aspx?
data=dafd99cde3184aa2b29943686bf619d0&tabid=326
http://www.loudoun.gov/
http://www.arlingtonva.us/departments/Treasurer/files/file71534.pdf
http://www.nctreasurer.com/dsthome/InvestmentMgmt/GovermentalOpsReports/asset+allocation+overvi
ew.htm
http://www.nystar.state.ny.us/board/assets/sbtif.pdf
http://www.treasurer.state.md.us/reports/Investment_Policy.pdf
Cash Flow Forecasting
Cash Flow Forecasting Outline
1. Objectives
2. Process
3. Components
4. Analysis
5. Float

78
Objectives of Cash Flow Forecasting

1. Budget Execution Management


2. Financial & Treasury Control
3. Strategic Objectives
4. Capital Budgeting & Net Borrowing
Costs
5. Liquidity Management

79
Budget Execution Management
Cash flow planning and forecasting as a result of
the synchronization of revenue estimates and
spending plans results in a coordinated effort to
make sure that resources are available when
needed to properly execute the budget and meet
the needs of a variety of budget stakeholders.

80
Financial & Treasury Control
• Comparing actual cash flows to estimates is
fundamental to asset and liability management
(especially in the “current” section of the balance
sheet)

• Preparing cash flow estimates leads to


improvements in the collections and
disbursement processes

81
Strategic Objectives

Cash forecasting can be used as the basis for


evaluating alternative strategic financial policy
objectives.

82
Capital Budgeting & Net Borrowing Costs

• Forecasts of revenues & expenditures (incl. borrowing


costs) will lead to improved techniques for evaluating
different projects.

• Cash flow forecasting leads to a financial analysis of


alternatives to finance operating and capital budgets that
will seek to minimize the “costs” involved.

83
Liquidity Management

Forecasting the cash position is essential to


managing maturities and issuance of
investments and debt.

84
Cash Flow Forecasting Process
• Horizon

• Participants

• Budget

• Methodology

• Information Sources

• Components
85
Forecasting Horizons
• Short Term
– Less than one month

• Medium Term
– Quarterly

• Long Term
– One Year or More
86
Participants
•Treasury
•Budget Department
•External/Internal Debt Departments
•Ministry of Finance (Macro Economic Department)
•Tax/Customs Ministries
•Other Line Ministries
•Spending Units
•Central Bank (or Commercial Banks)

Everyone has to be involved in some way to get a good forecast!

87
Budget
• The primary financial management tool of
the government.

• All estimates of cash flows must start with


this financial management tool, especially
since it is usually prepared on a cash
basis.

88
80 – 20 Rule
• In cash flow forecasting every piece of the
puzzle is important, but…….

• 80 percent of our revenue (& expenditures)


comes from (or goes to) 20 percent of our
sources

• This means that we need to spend the most


time on the “80” rather than on the “20”!

89
Methodology
• Fund vs. Agency Basis
– Fund: Forecasting cash flows on the basis of
governmental fund types i.e. general revenue
fund, highway (road) fund, etc.

– Agency: Forecasting cash flows on the basis


of governmental agency or ministry

90
Methodology
• Economic vs. Functional Basis
– Economic Class – Forecasting cash flows on the
basis of economic classification is probably the best,
because it lends itself to robust variance analysis

– Functional – Forecasting cash flows on the functional


basis of government is possible but probably does not
lend itself to a thorough analysis of patterns or
variances between forecasts and actuals.

91
Methodology
• Degree of Certainty
– Certain Flows

– Forecastable Flows

– Less Predictable Flows

92
Information Sources
• Information Systems

• Cash vs. Accrual

• Banking System

• Budget Documents

93
Components
• Revenues

• Expenditures

• Lending

• Borrowing

• Other Balance Sheet Accounts


94
Revenues
• Budget as source reference.

• The initial budget revenue estimate must be


backed by some consistent, corroborating
macroeconomic analysis.

• Revenue collecting agencies should prepare


monthly estimates using budget as a base.

• Weekly or daily estimates of the monthly plan can


be prepared using historical daily data lined up
against “payment due dates”.
95
Revenues
For example: 1,000 currency units are estimated in a
given month for corporate income tax which is due on
the 15th of the month. It is probable that 70/80 percent
of the tax estimated to be collected will be received
from the 14th to the 18th of the month. (Assuming all
are business days.) This type of information can be
confirmed by reviewing historical cash flow information
and comparing the dates received to the dates due.

96
Revenues
40
• More than likely, for a tax
35
like a corporate profits
30 tax, you will see such a
25 pattern during a month.
% of
20 Monthly
Collections
15
• A sales tax or VAT
10 collected through the
5 month will likely have a
0 flatter, more even
1 8 15 22 29 pattern.
Day of the Month

97
Expenditures

• Spending Plans

• Historical Review
– Rates of Spending
– Seasonality of Spending

98
Spending Plans
• The use of spending plans is probably the most thorough way to
develop a forecast of cash outflows.

• Spending Units (or other level of Ministry) should prepare


monthly spending estimates based on budget and guidance on
revenue forecasts.

• The spending plan should incorporate the proper level of


flexibility given the seasonal nature of some spending categories.

• The development of spending plans must be examined on a cost


benefit basis relative to the value of their preparation.

• The “80 percent” of the spending still needs the most attention!

99
Historical Information
• The past is usually the best predictor of the
future in countries with mature financial and
budgetary systems.

• The past can be the best predictor of the future


in countries with young financial and budgetary
systems if information can be “normalized” for
the current year’s situation.

• Use the Calendar to examine the patterns!


100
Expenditures
• The spending plans and historical data
can be used to forecast monthly data.

• Historical information, common sense and


“known” dates will assist with weekly and
even daily breakdowns.

101
Lending (Assets)

• Estimated cash flows from outstanding


loans.

• Cash flows out to fund new loans

• Should be included in budget.

102
Borrowing (Liabilities)

• Existing debt payments

• Timing of issuance of debt

• Timing of new payments on recently


issued debt

103
Changes in Other Balance Sheet Accounts
• Cash flows from:
– Accounts Receivable

– Asset Sales (Privatization)

– Sale of Precious Metals

– Equity Investments (Dividends)

– Foreign Exchange Activity

– Maturing Short Term Investments

104
Changes in Other Balance Sheet Accounts
• Cash flows to:
– Equity investments in public entities

– Purchase of precious metals

– Pay down of past due accounts payable

– Foreign exchange activity

– New short term investments

105
Variance Analysis

• Fundamental Issues

• Legal Issues

• Technical (Administrative) Issues

106
Fundamental Issues Affecting Variances
• Economic growth higher or lower relative to assumptions:
– Higher/lower than expected tax collections
– Decrease/Increase in citizens seeking social benefits

• Economic conditions leading to increased borrowing costs or


higher investment earnings

• Inflation rates higher than expected leading to higher rates of


growth in indexed payments.

• Disasters/Emergency Situations

• Foreign Exchange

107
Legal Issues Affecting Variances
• Changes to tax laws by legislature that effect
revenue collections.

• Payouts of settlements of court cases.

• Court interpretations of existing tax laws or


spending mandates.

• Sharing ratio of taxes between levels of


government.
108
Tech/Admin Issues Affecting Variances
• “Float”
– Collections
– Disbursements

• Calendar Issues

• Coding Issues

109
Modifications to Cash Flow

• Fundamental Issues

• Legal Issues

• Technical (Administrative) Issues

110
Understanding and Measuring “Float”
Collection Float
• Mail Float
– The delay between the time a check (payment) is mailed
and it is received.

• Processing Float
– The delay between the time a payment is received and it is
deposited.

• Availability Float
– The delay between the time a payment is deposited and the
time the account is credited.

112
Disbursements Float
• Mail Float
– The delay between the time a check is mailed and the
date the check is received.

• Processing Float
– The delay between the time the payee receives the
check and the time the check is deposited.

• Clearing Float
– The delay between the time the check is deposited and
the time it is presented to the payor’s bank for payment.

113
Float Analysis
• The purpose of analyzing disbursement and collections
float is to shorter this float to as few days as possible.

• Cutting down the time for funds to go from point A to


point B and having information systems tracking this
information every step of the way will lead to decreased
costs.

• Shortening disbursement or collections float will likely be


the result of using improved banking products or making
changes in internal administrative processes.

114
Measuring Float

Revenue Dollar Calendar Dollar Days of


Amount Days of Float Float

1 1,500,000 4 6,000,000
2 4,500,000 2 9,000,000
3 3,000,000 6 18,000,000
Totals 9,000,000 33,000,000

115
Measuring Float

• Average Daily Float = Total Dollar Days of


Float/Total Calendar Days in Period

• Annual Cost of Float = Average Daily Float


* Opportunity Cost of Funds

116
Measuring Float

• Average Daily Float = 33,000,000/30


• Average Daily Float = 1,100,000

• Annual Cost of Float = 1,100,000*9%


• Annual Cost of Float = 99,000

117
Managing Cash
Inflows and Outflows
Managing Cash Flows

• Accounting Controls

• Banking Products & Services

119
Accounting Controls
• Payment Frequency
– On-Demand vs. Once Per Week Disbursements

• Vendor Analysis

• Aggregation of Multiple Payments to Single


Vendors

• Payment Terms

120
Banking Products
• Zero Balance Account

• Fraud Prevention

• Wire Transfers

• Automated Clearing House

• Disbursements

• Purchasing and T/E Cards

121
Banking Products/Terminology

• Deposits - Paper Checks

• Armored Car/Currency

• Lock Box

• Credit Cards

122
Zero Balance Account
• ZBAs are linked to Concentration Accounts

• At the end of each day any positive or negative


balances are netted

• Can accept deposits or disbursements

• Not the same as a sweep account

123
Zero Balance Account

• Can be used to improve reconciliation


process
– Typically used for payroll or benefits
– Federal Receipts

124
Fraud Prevention

• Debit Blocks

• Debit Filters

• Both restrict potentially fraudulent ACH


transactions from posting to an account

125
Wires

• Real Time Gross Settlement (RTGS)

• Same day availability

126
Automated Clearing House
• Batch processed electronic payment system
• Not same day credit
• Funds Availability
• Used for high volume/low value payments
• Payments can be scheduled up to two weeks in
advance
• Electronic Data Interchange
• Cash Concentration

127
Paper Checks - Disbursements

• Account Reconcilement
– “Issue File”
– “Positive Pay”/”Payee Name Verification”

• Controlled Disbursement

128
Purchasing Cards
• Simplifies Purchasing and Payment Process

• Lower Overall Transaction Processing Costs


per Purchase

• Increased Information

• Reduced Paperwork

129
Purchasing Cards

• Decentralizes the Purchasing Function

• Set/Control Purchasing Dollar Limits

• Set/Control Vendors

• Rebates Available
130
Purchasing Cards

• Written Agreement with Bank

• Written Polices and Procedures with Staff

• End of Year Tax Reporting

131
Paper Checks - Receipts

• Deposit Reconciliation
– Reporting of deposits by location

• Remote Deposit
– “On-site” conversion of checks to electronic
images for deposit

132
Armored Car - Outsourcing

• Some armored car companies can offer


private “vaults.”

• “Vault” acts as an extension of the bank’s


teller line.

133
Lockbox
• Wholesale
– High dollar value/low volume
– Many non-standard invoices or single
payments for multiple invoices

• Retail
– Low dollar value/high volume
– Standardized invoices (Utilities)
134
Credit Cards
• Types of Payments

• Infrastructure needed

• Internal Controls

• Liability

135
Questions?
Laura Trimble: ltrimble@ota.treas.gov
Gail Ostler: gostler@otatreas.us

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