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

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Uses tools of control, risk management, forecasting, good financial reporting and analysis ... Analysis of just financial statements rarely gives a final answer ... – PowerPoint PPT presentation

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Title: 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 organizations 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
Variance Reports and Analysis
Management Discussion 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 Managers 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

51


1 Allowances are automatically distributed in
the same way.
52
Expenditure Plans of Organization Budget, Program
  • Subject to adjustments and clarifications
  • In-year program adjustments
  • External charges, e.g. central services
  • Reserves and partial distributions by senior
    management
  • Objective is to arrive at the Adjusted Budget of
    the responsibility centre

53
To Get to an Adjusted Budget
  • Take original budget
  • Apply changes increases, decreases, etc
  • Allocate to units and total.
  • An adjusted budget is not a projection it
    reflects decisions and changes subsequent to the
    original budget

54
Salary adjustments from collective bargaining
400,000 plus 350,000 from DMs special youth
employment funds Departmental target to reduce
overtime your share is 100K ¹Special central
agency funding one year only for technology
training.
55
Continued in Cash Management From a Cash Flow
Plan to Process Governance
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