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– Definition
– Objectives
– Importance
– What It Is NOT
– Results of a Poorly Defined Program
– Components of a Strong Program
4
Definition of Cash Management
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
7
Importance of Cash Management
8
Cash Management is NOT
9
Cash Management is NOT
• Cash management is NOT budget or
accounting control
10
Cash Management is NOT
11
Results of a Poorly Defined Program
12
Results of a Poorly Defined Program
13
Results of a Poorly Defined Program
14
Components of a Strong 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
– The government earns interest on all its available cash balances and
in turn pays for all the banking services it receives
19
Components of a Strong Program
• Banking
– Banks perform the following types of services:
• Sweep funds at the end of day
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
24
Components of a Strong Program
• Be Proactive
– Take action when projections indicate
larger variances than expected
25
Organization and Communication
Organization and Communication
– Flow of Information
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
29
Cash Management Unit
30
Cash Management Unit
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
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
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
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
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
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
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
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
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
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)
81
Strategic Objectives
82
Capital Budgeting & Net Borrowing Costs
83
Liquidity Management
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)
87
Budget
• The primary financial management tool of
the government.
88
80 – 20 Rule
• In cash flow forecasting every piece of the
puzzle is important, but…….
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.
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
91
Methodology
• Degree of Certainty
– Certain Flows
– Forecastable Flows
92
Information Sources
• Information Systems
• Banking System
• Budget Documents
93
Components
• Revenues
• Expenditures
• Lending
• Borrowing
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.
• 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.
101
Lending (Assets)
102
Borrowing (Liabilities)
103
Changes in Other Balance Sheet Accounts
• Cash flows from:
– Accounts Receivable
104
Changes in Other Balance Sheet Accounts
• Cash flows to:
– Equity investments in public entities
105
Variance Analysis
• Fundamental Issues
• Legal 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
• Disasters/Emergency Situations
• Foreign Exchange
107
Legal Issues Affecting Variances
• Changes to tax laws by legislature that effect
revenue collections.
• Calendar Issues
• Coding Issues
109
Modifications to Cash Flow
• Fundamental Issues
• Legal 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.
114
Measuring 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
116
Measuring Float
117
Managing Cash
Inflows and Outflows
Managing Cash Flows
• Accounting Controls
119
Accounting Controls
• Payment Frequency
– On-Demand vs. Once Per Week Disbursements
• Vendor Analysis
• Payment Terms
120
Banking Products
• Zero Balance Account
• Fraud Prevention
• Wire Transfers
• Disbursements
121
Banking Products/Terminology
• Armored Car/Currency
• Lock Box
• Credit Cards
122
Zero Balance Account
• ZBAs are linked to Concentration Accounts
123
Zero Balance Account
124
Fraud Prevention
• Debit Blocks
• Debit Filters
125
Wires
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
• Increased Information
• Reduced Paperwork
129
Purchasing Cards
• Set/Control Vendors
• Rebates Available
130
Purchasing Cards
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
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