Description
meaning,objectives,review of literature
Cash Management: Part 1: From Concepts to Developing an Adjusted Budget
Andrew Graham Queens University School of Policy Studies
Definitions
• Cash, budget, treasury and liquidity can all get confused at this point • No one term exists for the management of in-year budgets
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
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,
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
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
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
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
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
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
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
What is so Important about Cash Management?
• Resource management serves as an important performance indicator for managers and their organization as a whole
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
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
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.
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 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
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
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.
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
?
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.
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
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
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.
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
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
From Cash Flow to Cash Forecasting: Financial Statements
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.
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.
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
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?
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?
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?
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?
Elements of a Cash Management System
• An appropriated budget • Build in changes and modifications to the approved budget to create an adjusted budget
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
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
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.
Roles and Responsibilities
• Senior management must set budgets and program direction • Line managers must manage the resources they are given to carry out programs
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
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
Roles and Responsibilities
• Senior managers must determine what actions to take based on these two sets of inputs.
The Cash Management Cycle
Assess Budget Implications for Next Year Adjusted Budget Plan for Year Budget Appropriate d Cash Requirements Hold Backs/Reserve s/ Adjustments Adjusted Budget
Senior Management Direction: Reallocation
Budget Plan for Year
Senior Management Reporting and Review Management Discussion and Analysis Variance Reports and Analysis
Reporting Results: Actual vs Plan: Financial and Operations
Cash Management Process
Expenditure Plans of Organization: budget, program
Financial Performance Reports
Adjustments and Modifications to Plans
Variance Reports: Ratios and Historical
Senior Management Review and Decision
Cash Forecast Report: (Financial Review) by CFO:
Program Manager?s Input: explanations, plans and flexibilities
Expenditure Plans of Organization: Budget, Program
• All financial reporting and inyear 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 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
Impediments to establishing a base budget
• Senior managers withhold authorities pending further changes • Dependency on external funding sources, e.g. intergovernmental transfers
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
Allotment Full Time Equivalents
Salaries
Original Budget 3,200
162,977,546
Allowances
Overtime Salary Dollars Operating and Maintenance Grants and Contributions[1] Capital Expenditures[2] – Construction and Equipment Total All Allotments
8,945,800
4,085,000 64,766,850 5,600,000 7,500,000 253,875,196
[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.
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
Allotment DMO
Policy
Operations Inspection and Services Services
150 1200 1100
CIO
CFO
FTEs Salaries[1 ] Overtime
150
300
300
7,639,000 7,639,000 0 250,000
61,116,579 56,023,531 15,279,144 15,279,144 1,000,000 2,335,000 500,000 0 4,766,850
Operating 3,000,000 2,000,000 and Maintena nce Grants and Contribut ions Capital Expendit ures 2,000,000 3,600,000
20,000,000 24,000,000 11,000,000
0
0
0
0
500,000
300,000
2,000,000
2,000,000
2,500,000
200,000
[1] Allowances are automatically d
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
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
LINE ITEM
BUDGET This fiscal year
CHANGES
ADJUSTED BUDGET This fiscal year
SALARIES OVERTIME TRAINING TOTAL STAFF COST
3,500,000 750,000* 500,000 (100,000)** 250,000 75,000¹ 4,250,000 725,000
4,250,000 400,000 325,000 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 Management: From a Cash Flow Plan to Process Governance
doc_159066940.ppt
meaning,objectives,review of literature
Cash Management: Part 1: From Concepts to Developing an Adjusted Budget
Andrew Graham Queens University School of Policy Studies
Definitions
• Cash, budget, treasury and liquidity can all get confused at this point • No one term exists for the management of in-year budgets
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
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,
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
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
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
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
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
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
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
What is so Important about Cash Management?
• Resource management serves as an important performance indicator for managers and their organization as a whole
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
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
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.
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 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
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
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.
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
?
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.
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
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
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.
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
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
From Cash Flow to Cash Forecasting: Financial Statements
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.
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.
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
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?
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?
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?
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?
Elements of a Cash Management System
• An appropriated budget • Build in changes and modifications to the approved budget to create an adjusted budget
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
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
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.
Roles and Responsibilities
• Senior management must set budgets and program direction • Line managers must manage the resources they are given to carry out programs
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
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
Roles and Responsibilities
• Senior managers must determine what actions to take based on these two sets of inputs.
The Cash Management Cycle
Assess Budget Implications for Next Year Adjusted Budget Plan for Year Budget Appropriate d Cash Requirements Hold Backs/Reserve s/ Adjustments Adjusted Budget
Senior Management Direction: Reallocation
Budget Plan for Year
Senior Management Reporting and Review Management Discussion and Analysis Variance Reports and Analysis
Reporting Results: Actual vs Plan: Financial and Operations
Cash Management Process
Expenditure Plans of Organization: budget, program
Financial Performance Reports
Adjustments and Modifications to Plans
Variance Reports: Ratios and Historical
Senior Management Review and Decision
Cash Forecast Report: (Financial Review) by CFO:
Program Manager?s Input: explanations, plans and flexibilities
Expenditure Plans of Organization: Budget, Program
• All financial reporting and inyear 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 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
Impediments to establishing a base budget
• Senior managers withhold authorities pending further changes • Dependency on external funding sources, e.g. intergovernmental transfers
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
Allotment Full Time Equivalents
Salaries
Original Budget 3,200
162,977,546
Allowances
Overtime Salary Dollars Operating and Maintenance Grants and Contributions[1] Capital Expenditures[2] – Construction and Equipment Total All Allotments
8,945,800
4,085,000 64,766,850 5,600,000 7,500,000 253,875,196
[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.
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
Allotment DMO
Policy
Operations Inspection and Services Services
150 1200 1100
CIO
CFO
FTEs Salaries[1 ] Overtime
150
300
300
7,639,000 7,639,000 0 250,000
61,116,579 56,023,531 15,279,144 15,279,144 1,000,000 2,335,000 500,000 0 4,766,850
Operating 3,000,000 2,000,000 and Maintena nce Grants and Contribut ions Capital Expendit ures 2,000,000 3,600,000
20,000,000 24,000,000 11,000,000
0
0
0
0
500,000
300,000
2,000,000
2,000,000
2,500,000
200,000
[1] Allowances are automatically d
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
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
LINE ITEM
BUDGET This fiscal year
CHANGES
ADJUSTED BUDGET This fiscal year
SALARIES OVERTIME TRAINING TOTAL STAFF COST
3,500,000 750,000* 500,000 (100,000)** 250,000 75,000¹ 4,250,000 725,000
4,250,000 400,000 325,000 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 Management: From a Cash Flow Plan to Process Governance
doc_159066940.ppt