Cash Management: Part 2: From a Cash Flow Plan to Process Governance Andrew Graham Queens University...
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Transcript of Cash Management: Part 2: From a Cash Flow Plan to Process Governance Andrew Graham Queens University...
Cash Management: Part 2: Cash Management: Part 2: From a Cash Flow Plan to From a Cash Flow Plan to
Process GovernanceProcess Governance
Andrew GrahamQueens University
School of Policy Studies
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• In-year cash management requires a sense of how funds will flow or be expended
• Eliminate non-cash and accruals
Do Not Just Divide by 12!Do Not Just Divide by 12!
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Generally managers are expected to prepare cash flow plans based on:– Historical data– Their program plans
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Not all funds flow at once – some costs are distributed over the fiscal year, some are spent at one time, some are held in reserve
• Often capital is on a different cash flow cycle and not included.
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Such flows are predictable within limitations. e.g. salary dollars
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Some are less predictable in terms of planning, e.g. overtime, but such unpredictability can be mitigated using historical data
• Cash flows can be limited by managerial discretion: spending authority limits, internal budget restrictions, tolerance boundaries
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Some costs flow in large chucks, e.g. transfers, grants, etc – this has both predictable and unpredictable elements in terms of planning: the key here is when to form the view that not all funds will be expended and are free for other purposes
Developing a Cash Flow Plan for Developing a Cash Flow Plan for the Responsibility Centrethe Responsibility Centre
• Are there any other ‘rules of the game’ set in place by the organization: – Informal reserves and hold-backs– Reporting frequency– Degree of detail– Contingency funds – formal and informal– Budget conditions– Limitations on managerial flexibility
End result: Manager’s
Expenditure Plan
Factors to take into account in Factors to take into account in building a cash flow planbuilding a cash flow plan
• Previous patterns of inflow in past year, e.g. donations tend to peak during major fund-raising events with regularity, major government funding tends to flow two times a year provided the grants is approved in advance
Factors to take into account in Factors to take into account in building a cash flow planbuilding a cash flow plan
• Anticipation of any changes that might cause such a flow to alter, e.g. the organization decides that it will change its fund-raising campaign to a different type and a different time, a major donor adjusts some criteria and is reviewing its procedures which may create delays.
Factors to take into account in Factors to take into account in building a cash flow planbuilding a cash flow plan
• Timing of the maturity of investments or endowments in various funds;.
Factors to take into account in Factors to take into account in building a cash flow planbuilding a cash flow plan
• Awareness of the timing of cash requirements to match them up with inflows, e.g. major capital expenses are anticipated for the summer, thereby necessitating a cash outflow demand surge in late summer; this will not help anticipate inflows, but will inform and condition the risks and urgencies around the first two elements.
Expenditure Plans of Organization: budget, program
Financial Performance Reports
Manager’s Expenditure
Plan
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
0
200
400
600
800
1000
North Salaries
Overtime Training
Youth Employment
Cash Flow Plan - XYZ Branch
The Financial Analysis ProcessThe Financial Analysis Process
• Whenever possible gets comparative data:– - for the organization over time, – - for the organization's peers, and– - for benchmarking organizations
(if they exist).
• Organize the information and complete the analysis.
The Financial Analysis ProcessThe Financial Analysis Process
• Will compare financial performance to the Manager’s Expenditures Plan – often input into organizational financial system
Sample Financial Report Cover Sheet Sample Financial Report Cover Sheet – Part One– Part One
PAY MINOR CAPITAL
TRANSFER PAYMENTS
MAJOR CAPITAL
TOTAL
YEAR TO DATEBUDGET
ACTUALS
VARIANCES
YEAR ENDBUDGET
YTD ACCTUALS +COMMITMENTS
FREE BALANCE
PAY MINOR CAPITAL
TRANSFER PAYMENTS
MAJOR CAPITAL
TOTAL
FREE BALANCE (CONT.)
YEAR END FORECAST
DEFICIT/ SURPLUS
% YTD ACTUALS VERSUS BUDGET
NORMAL EXPECTATIONS
Part TwoPart Two
The uses of historical dataThe uses of historical data
• Why it is important?• Developing comparisons year to
year• Understanding what has changed
and what remains the same• Developing useful variance
reporting based on historical data
All Overtime Hours Used by Month by Fiscal Year
-
15,000
30,000
45,000
60,000
APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR
Month
All
Ove
rtim
e H
ours
Use
d
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
An Example of the Use of Historical An Example of the Use of Historical DataData
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
0
200
400
600
800
1000
Plan Last Year Acutal
This Year Actual
Cash Flow Variance Report - XYZ Branch - Salaries - 2nd Quarter
93% of last year’s budget spent46% of this year’s
budget expended
Potential YearSavings =312,000
Sometime historical data in non-Sometime historical data in non-monetarymonetary
Table 3: Shelter Admissions
05
10152025303540
J F M A M J J A S O N D
Month
Ad
mis
sio
ns
2002
2003
2004
Use of Average costs and Use of Average costs and cost formulae to project cost formulae to project
forecastsforecastsRevenue Data Source Previous Years’ Usage Average
Average Vehicle Permits Sold 2004 14682003 12162002 1240
1308
Group Camping Rate N/A 58
Group Camp Sites – days leased 2004 1252003 1172002 125
122
Backcountry Camping Sites – 18+ 2004 14192003 14962002 1225
1380
Backcountry Camping Sites – 6 to 17 2004 6722003 6112002 522
601
Laundry Concession 2004 24172003 20212002 1867
2102
Canoe Rentals 2004 341912003 316612002 31329
32393
Reservations 2004 5804
3 Year Averages Only:a. Campsites Occupiedb. Bus Permitsc. Seasonal Vehicle Permitsd. Daily Vehicle Permite. Firewood Sales
1728916
1593284
38000
Analyzing Encumbrances and Analyzing Encumbrances and CommitmentsCommitments
• Key tool in governments to ensure that budgets do not go over approved limits
Analyzing Encumbrances and Analyzing Encumbrances and CommitmentsCommitments
• “Financial commitments are obligations to outside organizations or individuals that become liabilities if and when terms of exiting contracts, agreement or legislation are met.” – CICA
Analyzing Encumbrances and Analyzing Encumbrances and CommitmentsCommitments
• For cash forecasting, commitments may not be formal entries but rather managerial statements of intention that certain funds will be fully spent for their intended purpose even though they do not appear as either formal commitments in a cash balance sheet or liabilities in an accrual based balance sheet
Analyzing Encumbrances and Analyzing Encumbrances and CommitmentsCommitments
• Positive uses: inform management of actual flexibility and spending plans
• Negative use: protect funds• Danger of unspent funds at the
end of the year
Developing a Spending Plan/ForecastDeveloping a Spending Plan/Forecast
• Level of detail should reflect need for information, risk, materiality and timeliness, e.g. once a month, once quarterly
• Managers should be able to project cash flows over the year
Developing a Spending Plan/ForecastDeveloping a Spending Plan/Forecast
• Dividing by 12 hardly useful or generally not realistic – forecast should reflect the ebbs and flows of expenditure patterns
• Block or grant expenditures tends to be all at once
Quality of Forecasting and Quality of Forecasting and DataData
• Key to provide financial information derived from current information, known changes and trends and announcement
• Comparison of data from current year to prior years always useful
Translating and Interpreting Translating and Interpreting DataData
• Usefulness of different perspectives– Budget managers– Financial advisor– Organizational head– Corporate financial advisor
Translating and Interpreting Translating and Interpreting DataData
• Role of the challenge function• Reporting that makes data
relevant to managers and to decision makers: management’s discussion and analysis (MD&As)
Management Discussion and AnalysisManagement Discussion and Analysis
• Should provide basis for discussion and decision making
• Language should be business-oriented and not excessively detailed
Management Discussion and AnalysisManagement Discussion and Analysis
• Objective and easily readable analysis of financial activities based on currently know facts, decisions or conditions
Management Discussion and AnalysisManagement Discussion and Analysis
• Projections are an essential part of cash forecasting, but should be fact based whenever possible
• Otherwise projections should be subject to a variety of opinions to test the hypotheses they contain
Questions the Management Questions the Management Report must answer…..Report must answer…..
• Are we going to be within our budget allotments?
• Are we operating according to our budget plan?
Questions the Management Questions the Management Report must answer…..Report must answer…..
• How does our performance compare with relevant historical data?
• Does this performance mean that more funds may be necessary or that some funds may become surplus in this area and available for reallocation?
• What are the variances and why have they occurred?
Questions the Management Questions the Management Report must answer…..Report must answer…..
• What is the responsibility centre manager going to do about the negative variances?
• Are positive variances within a retention range for the local manager or are they available for other needs outside the unit but within the organization?
Questions the Management Questions the Management Report must answer…..Report must answer…..
• Do we have the needs and authorities to reallocate these funds?
• What does this information tell us about the performance of the manager in this unit?
• What does this information tell us about the long-term funding?
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
0200400600800
1,0001,200
Plan
Last Year Acutal
This Year Actual
This Year Actual and Projected
Cash Flow Variance Report - XYZ Branch - Salaries - 2nd Quarter
Reporting and Discussing Risk in Reporting and Discussing Risk in Cash ManagementCash Management
• Need to distinguish between short-term and long-term risk
• Risk is a key element in determining to change budget allocations either temporarily or permanently
Reporting and Discussing Risk in Reporting and Discussing Risk in Cash ManagementCash Management
• Key risk in cash management is over-expenditure of budget or failure to fully use funds available and needed
Reporting and Discussing Risk in Reporting and Discussing Risk in Cash ManagementCash Management
• Other types of risk to consider: – Inappropriate use of funds– Surges or declines in demand leading to
cost over-runs or under-usage– Emerging and unanticipated issues: mad
cow, SARS
• Financial reports should not originate the organization’s development of risk but should reflect its overall management process
Risk of over-expending is Risk of over-expending is sometimes graphic and sometimes graphic and
clear……….clear……….STAFFING: BUDGET VERSUS ACTUAL
180
190
200
210
220
230
240
250
JUNE OCT DEC MARCH YEAREND
PLAN
ACTUAL
Financial Performance Reports
Variance Reports: Ratios and Historical
Program Manager’s Input: explanations, plans and flexibilities
Cash Forecast Report: (Financial Review) by CFO:
Cash Forecast ReportCash Forecast Report
• Can take many forms: briefing notes, PowerPoint presentation, charts, graphs
• Should have some predictability in format and language
Cash Forecast ReportCash Forecast Report
• Some analytical information that is important: – Historical comparisons– The cost of the variance to date, i.e.
how much of the actual budget has been spent
– The projected variance should nothing change, i.e. the straight line projection
– The variance in comparison to similar units in the system
Cash Forecast ReportCash Forecast Report
• Additional components of the report that set managerial context:– What caused the gap between expectations
and results, e.g. fewer retirements or transfers than required?
– Workload determinants that changed in actual performance, e.g. inmate population increases and opening of an old unit for an emergency
– Inefficiencies that remain, e.g. excessive posts.
– Limitations of the budget itself– Actions that could be taken to correct the
situation.
Cash Forecast ReportCash Forecast Report
• Should be a regular submission to the senior management committee of the organization
• Should move financial information, various background information, etc into the realm of text, ideas and integration
Cash Forecast ReportCash Forecast Report
• Generally the role of finance to prepare but not the role of finance to address: operational managers, responsibility centre heads, their bosses are key to this
Cash Forecast ReportCash Forecast Report
• It cannot cover all data – only relevant information:– Exceptional performance issues– Issues that the senior management
wants to keep a close eye on– Highly political or contentious issues– Separate funds– Areas of operational vulnerability or
poor performance
Cash Forecast ReportCash Forecast Report
• Questions to ask about variance: – What does the trend look like: is it in the right
direction? If so, can we tolerate the slower pace?
– Is this isolated to this unit or a general phenomenon?
– Did we set realistic targets?– Can we fund the shortfall that we see
emerging?– Is this manger delivering and, if not, is this
enough to force us to take some action like removing him and finding some else.
Cash Forecast ReportCash Forecast Report
• Should be a consensual document or at least focused on key decisions that CFO wants to receive or see made
• Should be devoid of surprise for all players
• Role of the top manager: Deputy or organizational head: steering towards decisions, reconciling differences
Some Solutions for Serious Cash Some Solutions for Serious Cash Management ProblemsManagement Problems
Panic!
Some Serious Solutions for Some Serious Solutions for Serious Cash Management Serious Cash Management
ProblemsProblems• Prepare your story and a plan: read
The Cash Management Games People Play
• Find ways to slow down spending where there is discretion
• Review commitments (both formal and informal) to determine flexibility to shut down or slow down
Some Serious Solutions for Some Serious Solutions for Serious Cash Management Serious Cash Management
ProblemsProblems• Reduce staff where this will work
quickly and without further costs, e.g. severance
• Not filling positions• Slowing down staffing• Delay orders, put them off until the
next period or year
Some Serious Solutions for Some Serious Solutions for Serious Cash Management Serious Cash Management
ProblemsProblems• Slow down programs/ eliminate
services• Beg or borrow from others within
the department: avoid mortgaging your future if you can
• Seek temporary relief from your boss, the organization as a whole
Some Serious Solutions for Some Serious Solutions for Serious Cash Management Serious Cash Management
ProblemsProblems• Seek out contingency funds, if
they exist• Examine possible use of non-
restricted funds• Seek a change in budget if it
can be justified
Setting the Rules for Distribution and Setting the Rules for Distribution and Redistribution of Surpluses, Carry-Redistribution of Surpluses, Carry-
Forwards etcForwards etc
• Huge tension between protecting your own resources and making a corporate contribution: affects information flow for senior management
• Important to understand how financial and performance information may be used
Setting the Rules for Distribution and Setting the Rules for Distribution and Redistribution of Surpluses, Carry-Redistribution of Surpluses, Carry-
Forwards etcForwards etc
• Danger of surprise in rules change – unless subject to extraordinary situations
Danger in awarding bad management: coming to the rescue is one
thing but doing it several years running simply creates new rules
That reward bad behaviour.
Setting the Rules for Distribution and Setting the Rules for Distribution and Redistribution of Surpluses, Carry-Redistribution of Surpluses, Carry-
Forwards etcForwards etc
• Example of reporting surpluses that financial analysis does not disclose: is it kept in the responsibility centre or does the organization have a ‘wish list’ or ‘critical needs list’ that distributes available funds to the list with no hold back in the responsibility centre – impacts human behaviour significantly
Setting the Rules for Distribution and Setting the Rules for Distribution and Redistribution of Surpluses, Carry-Redistribution of Surpluses, Carry-
Forwards etcForwards etc
• Issue of the use of the carry-forward provisions: is that rolled up corporately and used for other purposes or is it retained within the responsibility centre: has an impact on high level flexibilities
Senior Management Review and Decision
Adjustments and Modifications to Plans
Finis