Cash Management, Part 1 - POST: Faculty/Staff Connectivity at ...

Cash Management: Part Cash Management: Part 1: From Concepts to 1: From Concepts to

Developing an Adjusted Developing an Adjusted BudgetBudget

Andrew GrahamQueens University

School of Policy Studies

DefinitionsDefinitions

• Cash, budget, treasury and liquidity can all get confused at this point

• No one term exists for the management of in-year budgets

DefinitionsDefinitions

• 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

DefinitionDefinition

“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

What is so Important about Cash What is so Important about Cash Management?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


• 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


• 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


• 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


• In the public sector, even with accrual accounting, there remains a high measure of accountability for explaining what is happening to voted funds


• 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


• 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


• Resource management serves as an important performance indicator for managers and their organization as a whole


• 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

To Reiterate: The Objectives of To Reiterate: The Objectives of Effective Cash ManagementEffective 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

To Reiterate: The Objectives of To Reiterate: The Objectives of Effective Cash ManagementEffective 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.

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?

Qualities of the Cash Management Qualities of the Cash Management and Financial Performance Review and Financial Performance Review

ProcessProcess

• 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 considerationsSource: Reporting Principles, Canadian Comprehensive Audit Foundation, 2003

Qualities of the Cash Management Qualities of the Cash Management and Financial Performance Review and Financial Performance Review

ProcessProcess

• 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

In some countries, this is the In some countries, this is the lawlaw

The accounting officer (usually the CEO or DM equivalent) in New Zealand must submit to the relevant treasury and executive authority within 15 days ofthe end of each month, information on:

· the actual revenue and expenditure for that month, in the format determined by the nationalTreasury· projections of anticipated expenditure and revenue for the remainder of the current financial yearin 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 andrevenue remain within the budget.

The Cash Flow Statement: the The Cash Flow Statement: the Basis for Cash ForecastingBasis 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


• 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.


• 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

The Cash Flow Statement: the Basis The Cash Flow Statement: the Basis for Cash Forecastingfor 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

From Cash Flow to Cash From Cash Flow to Cash Forecasting: Financial Forecasting: Financial

StatementsStatements• 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.


StatementsStatements• Analysis of just financial

statements rarely gives a final answer

• Rather, it indicates where further analysis is needed


StatementsStatements• 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


StatementsStatements


StatementsStatements• 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.


StatementsStatements• The cash management process

is not a purely financial function. In fact it will fail if it is.


StatementsStatements• 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

Some other basic questions that Some other basic questions that good financial analysis can help good financial analysis can help

answeranswer• Is the organization on

budget? • Will there be over-runs, will

there be surpluses?• Have the budget

assumptions changed?


answeranswer• 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?


answeranswer

• What is the significance of these shifts?

• Is there a need for extra-ordinary action? Supplementary funding? Internal reallocation? Emergency funding?


answeranswer

• How are managers performing?

• What opportunities exist to solve problems internally or to meet unplanned demands that are nonetheless important for the organization?

Elements of a Cash Management Elements of a Cash Management SystemSystem

• An appropriated budget• Build in changes and

modifications to the approved budget to create an adjusted budget


• 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


• 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


• A governance mechanism that would – review the results,– assess variances and their analysis, – determine adjustments needed and – make decisions needed to affect

those adjustments.

Roles and Responsibilities Roles and Responsibilities

• Senior management must set budgets and program direction

• Line managers must manage the resources they are given to carry out programs


• 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


• Financial advisors must prepare reports for senior mangers to make decisions

• Line managers must respond to variances against plans with explanations, solutions and alternatives


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

Budget Appropriat

ed

AdjustedBudget

Budget Plan for Year

Cash Requirement

s

Hold Backs/Reser

ves/ Adjustments

Reporting Results: Actual vs

Plan: Financial

and Operations

Variance Reports

and Analysis

Management

Discussion and

Analysis

Senior Managem

ent Reporting

and Review

Senior Managem

ent Direction: Reallocati

on

Adjusted Budget Plan for Year

Assess Budget

Implications for

Next Year

The Cash Management CycleThe Cash Management Cycle

Cash Management Cash Management ProcessProcess

Financial Performance Reports

Variance Reports: Ratios and Historical

Program Manager’s Input: explanations, plans and flexibilities

Cash Forecast Report: (Financial Review) by CFO:

Senior Management Review and Decision

Adjustments and Modifications to Plans

Expenditure Plans of Organization: budget, program

Expenditure Plans of Organization: Expenditure Plans of Organization: Budget, ProgramBudget, 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

Impediments to establishing a Impediments to establishing a base budgetbase 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


• Senior managers withhold authorities pending further changes

• Dependency on external funding sources, e.g. intergovernmental transfers


• 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

AllotmentAllotment Original BudgetOriginal Budget

Full Time EquivalentsFull Time Equivalents 3,2003,200

SalariesSalaries 162,977,546162,977,546

AllowancesAllowances 8,945,8008,945,800

Overtime Salary DollarsOvertime Salary Dollars 4,085,0004,085,000

Operating and MaintenanceOperating and Maintenance 64,766,85064,766,850

Grants and ContributionsGrants and Contributions[1] 5,600,0005,600,000

Capital ExpendituresCapital Expenditures[2] – Construction and Equipment

7,500,0007,500,000

Total All AllotmentsTotal All Allotments 253,875,196253,875,196

[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.


• Budgets for responsibility centers are the result of the budgetary process that is then modified within the organization as funds are distributed

AllotmentAllotment DMODMO PolicyPolicy Operations Operations and and ServicesServices

Inspection Inspection ServicesServices

CIOCIO CFOCFO

FTEsFTEs 150150 150150 12001200 11001100 300300 300300

SalariesSalaries[1]

7,639,0007,639,000 7,639,0007,639,000 61,116,57961,116,579 56,023,53156,023,531 15,279,14415,279,144 15,279,14415,279,144

OvertimeOvertime 00 250,000250,000 1,000,0001,000,000 2,335,0002,335,000 500,000500,000 00

Operating Operating and and MaintenaMaintenancence

3,000,0003,000,000 2,000,0002,000,000 20,000,00020,000,000 24,000,00024,000,000 11,000,00011,000,000 4,766,8504,766,850

Grants Grants and and ContributContributionsions

2,000,0002,000,000 3,600,0003,600,000 00 00 00 00

Capital Capital ExpenditExpenditures ures

500,000500,000 300,000300,000 2,000,0002,000,000 2,000,0002,000,000 2,500,0002,500,000 200,000200,000

[1] Allowances are automatically distributed in the same way.


• 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

To Get to an Adjusted BudgetTo 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

LINE ITEM BUDGETThis fiscal

year

CHANGES ADJUSTED BUDGET

This fiscal year

SALARIES 3,500,000

750,000* 4,250,000

OVERTIME 500,000 (100,000)**

400,000

TRAINING 250,000 75,000¹ 325,000TOTAL STAFF COST

4,250,000

725,000 4,975,000*Salary adjustments from collective bargaining = 400,000

plus 350,000 from DM’s special youth employment funds

** Departmental target to reduce overtime – your share is 100K

¹Special central agency funding – one year only – for technology training.

Continued in Cash Continued in Cash Management: Management:

From a Cash Flow From a Cash Flow Plan to Process Plan to Process

GovernanceGovernance

Cash Management, Part 1 - POST: Faculty/Staff Connectivity at ...

Documents

cash management process

resource management

definitions cash

risk management

adequate cash

effective use of cash

liquidity management

budget alert senior