Cash Management: Part 1: From Concepts to Developing an Adjusted Budget

1. Cash Management: Part 1: From Concepts to Developing an Adjusted Budget Andrew Graham Queens University School of Policy Studies

2. Definitions • Cash, budget, treasury and liquidity can all get confused at this point • No one term exists for the management of in-year budgets

3. Definitions • This is not about managing bank accounts to ensure adequate cash is on hand: that is a liquidity management function – commonly called cash management • This is not about the effective use of cash at hand in terms of short-term investments: that is a treasury function • It is about managing the budget at hand effectively

4. Definition “In-Year Monitoring (viz. Cash Management) is the formal system which compares actual expenditures against Departmental spending plans for a given financial year and enables he adjustment of resources allocations to reflect changed circumstances in the that year.”[1] [1] “In-Year Monitoring of Public Expenditures and a Preliminary Analysis of February Monitoring 2002” Research paper 12/02, March, 2002, Research and Library Services, Northern Ireland Assembly

5. What is so Important about Cash Management? • Effective cash management creates opportunity for managers to: • Ensure that they remain within budget • Alert senior management to shifts in demand for services or other cost drivers • Maximize the use of their funds so that they are fully expended for their stated purpose and opportunities to meet emerging needs are met • Reallocate within a current year so meet unanticipated needs • A means of assessing departmental, unit and individual performance

6. What is so Important about Cash Management? • Effective cash management is an assumed responsibility of all responsibility centre managers: knowing how to do it is important • Uses tools of control, risk management, forecasting, good financial reporting and analysis

7. What is so Important about Cash Management? • An organization’s ability to collectively manage its current resources most effectively reflects its overall capacity to work as a team or unit toward a set of coherent goals

8. What is so Important about Cash Management? • The degree of flexibility and decentralization in an organization will have an impact on how cash is managed in terms of how it can and cannot be redistributed, the degree of reporting and the scope and role of central corporate offices within the organization

9. What is so Important about Cash Management? • In the public sector, even with accrual accounting, there remains a high measure of accountability for explaining what is happening to voted funds

10. What is so Important about Cash Management? • Some argue that the main concern is how cash is used during the period and not matching revenue and expense which is of a higher priority in the private sector – this remains a preoccupation of many players in the scene: managers, clients, oversight groups and legislators

11. What is so Important about Cash Management? • Regardless of such an argument, the heightened accountability in the public sector to restrain spend to budget limits but also to spend to the maximum possible for program benefit is real

12. What is so Important about Cash Management? • Resource management serves as an important performance indicator for managers and their organization as a whole

13. What is so Important about Cash Management? • Organizations are always looking for spare capacity and this is one way of finding it in the short term • It does not replace permanent reallocations, program evaluation or policy making that shifts resources in a formal way, i.e. legislatively or through other policy instruments

14. To Reiterate: The Objectives of Effective Cash Management • To have funds to pay the bills, i.e., sufficient liquidity • To use budgeted resources for their program purposes and not leave needed funds unspent

15. To Reiterate: The Objectives of Effective Cash Management • To keep within the appropriated or authorized budget • To have the organizational and resource capacity to reach to changes in plan • To reallocate available funds to meet emerging, short-term priorities.

16. Three basics questions arise during the ‘monitoring’ phase of the cash management process- • What has happened so far? • What do we think will happen to our plan for the rest of the year? • What (if any) actions do we need to take to achieve our agreed plan?

17. Qualities of the Cash Management and Financial Performance Review Process • Focus on a few critical aspects of performance • Look forward as well as back • Explain and react to key risk considerations • Explain and react to key capacity considerations Source: Reporting Principles, Canadian Comprehensive Audit Foundation, 2003

18. Qualities of the Cash Management and Financial Performance Review Process • Explain other factors critical to performance • Integrate financial and non-financial information • Provide comparative information • Present credible information, fairly interpreted • Disclose the basis of reporting

19. In some countries, this is the law • The accounting officer (usually the CEO or DM equivalent) in New Zealand must submit to the relevant treasury and executive authority within 15 days of • the end of each month, information on: • · the actual revenue and expenditure for that month, in the format determined by the national • Treasury • · projections of anticipated expenditure and revenue for the remainder of the current financial year • in the format determined by the national Treasury • · information on conditional grants received and actual spending against them • · information on all transfers • · any material variances and a summary of actions to ensure that the projected expenditure and • revenue remain within the budget.

20. The Cash Flow Statement: the Basis for Cash Forecasting • The Statement of Cash Flows focuses on the sources and uses of cash for the organization. • Cash Forecasting moves out of accrual to cash: Instead of matching EXPENSES with REVENUES in the period in which they are incurred, now we are concerned with matching CASH INFLOWS and CASH OUTFLOWS in the periods in which they are incurred

21. The Cash Flow Statement: the Basis for Cash Forecasting • All cash items regardless of their classification (expense, asset, fixed cost, variable cost, etc.) are accounted for in a cash budget. • Non-cash items (such as amortization) never appear.

22. The Cash Flow Statement: the Basis for Cash Forecasting • Why is it important to know the sources and uses of cash flow? Isn't knowing if cash increased or decreased enough? • Role of different line items • Cash flow variances reflect behavioral shifts

23. The Cash Flow Statement: the Basis for Cash Forecasting • In the end, knowing about cash movements is not enough: encumbrances and anticipated risk or costs changes are not reflected • Cash forecasting and financial reporting moves into the realm of bringing content, knowledge and numbers together

24. From Cash Flow to Cash Forecasting: Financial Statements • Financial analysis uses the financial statements and other sources of information to: • help managers and outsiders understand an organization's financial condition, • make decisions about the organization, and • compare an organization's financial performance to its peers.

25. From Cash Flow to Cash Forecasting: Financial Statements • Analysis of just financial statements rarely gives a final answer • Rather, it indicates where further analysis is needed

26. From Cash Flow to Cash Forecasting: Financial Statements • Good organization management, regardless of the size of the organization, demands that the organization regularly review its financial situation • Financial Statements/Cash Forecasts/ Financial Report/Review of Performance Reports are different names for such a process

27. From Cash Flow to Cash Forecasting: Financial Statements

28. From Cash Flow to Cash Forecasting: Financial Statements • Cash Management requires a mix of purely financial data, garnered from accounting systems and statements of managerial intention along with input from financial analysis and managerial analysis based on present plans, actual performance and relevant historical information to permit decision making about both the state of the cash situation of the organization and possibly where to look to do something about it.

29. From Cash Flow to Cash Forecasting: Financial Statements • The cash management process is not a purely financial function. In fact it will fail if it is.

30. From Cash Flow to Cash Forecasting: Financial Statements • Managers’ input at the beginning, middle and end is essential • Most financial information is submitted to the manager for decision: in a bureaucracy, that also means moving some decisions up the ladder, overseeing other financial managers, aggregating data to the level of the entity

31. Some other basic questions that good financial analysis can help answer • Is the organization on budget? • Will there be over-runs, will there be surpluses? • Have the budget assumptions changed?

32. Some other basic questions that good financial analysis can help answer • Is resource use matched to objectives? • How is the organization or its units performing relative to previous years, to each other and to plan? • Are significant shifts being detected in this data?

33. Some other basic questions that good financial analysis can help answer • What is the significance of these shifts? • Is there a need for extra-ordinary action? Supplementary funding? Internal reallocation? Emergency funding?

34. Some other basic questions that good financial analysis can help answer • How are managers performing? • What opportunities exist to solve problems internally or to meet unplanned demands that are nonetheless important for the organization?

35. Elements of a Cash Management System • An appropriated budget • Build in changes and modifications to the approved budget to create an adjusted budget

36. Elements of a Cash Management System • Cash flow projections over the budget period: the in-year cash flow or expenditure plan • A system of measuring actual financial performance in relation to the projected plan

37. Elements of a Cash Management System • A system of monitoring performance, identification of variances and reporting results at the appropriate level • The capacity for management discussion and analysis of the results and variances

38. Elements of a Cash Management System • A governance mechanism that would • review the results, • assess variances and their analysis, • determine adjustments needed and • make decisions needed to affect those adjustments.

39. Roles and Responsibilities • Senior management must set budgets and program direction • Line managers must manage the resources they are given to carry out programs

40. Roles and Responsibilities • Financial advisors must provide information for decision making to budget setters as well as advice line managers about their budgets • Financial advisors must also provide information and analysis to identify variances, offer comparisons and further analysis of budget perform and make recommendations to line managers and senior managers

41. Roles and Responsibilities • Financial advisors must prepare reports for senior mangers to make decisions • Line managers must respond to variances against plans with explanations, solutions and alternatives

42. Roles and Responsibilities • Senior managers must determine what actions to take based on these two sets of inputs.

43. The Cash Management Cycle Assess Budget Implications for Next Year Budget Appropriated Cash Requirements Hold Backs/Reserves/ Adjustments Adjusted Budget Plan for Year Adjusted Budget Senior Management Direction: Reallocation Budget Plan for Year Reporting Results: Actual vs Plan: Financial and Operations Senior Management Reporting and Review Management Discussion and Analysis Variance Reports and Analysis

44. Cash Management Process Expenditure Plans of Organization: budget, program Financial Performance Reports Variance Reports: Ratios and Historical Adjustments and Modifications to Plans Senior Management Review and Decision Program Manager’s Input: explanations, plans and flexibilities Cash Forecast Report: (Financial Review) by CFO:

45. Expenditure Plans of Organization: Budget, Program • All financial reporting and in-year decisions begin with a budget allocation to a responsibility centre • Difficult to hold a manager accountable if she/he does not know his/her budget

46. Impediments to establishing a base budget • Uncertainty in the financial position • Failure of legislative authority to approve appropriations • Failure of the department to distribute the budget to responsibility centres • Program change announcements made without budget adjustments

47. Impediments to establishing a base budget • Senior managers withhold authorities pending further changes • Dependency on external funding sources, e.g. intergovernmental transfers

48. Impediments to establishing a base budget • Multiple sources of program funding within the organization but not within the responsibility centre, e.g. centrally held funds • Creation of reserves, hold-backs and only provisional budgeting

49. [1] Grants and Contributions are a Special Fund and cannot be reallocated to other budgets. [2] Capital Expenditures are a Special Fund and cannot be reallocated with permission from Management Board using a formal submission process. However, some non-recurring salary costs for project management and implementation can be built into the capital budget.

50. Expenditure Plans of Organization: Budget, Program • Budgets for responsibility centers are the result of the budgetary process that is then modified within the organization as funds are distributed