1、Cash Management: Part 2: From a Cash Flow Plan to Process Governance,Andrew Graham Queens University School of Policy Studies,Developing a Cash Flow Plan for the Responsibility Centre,In-year cash management requires a sense of how funds will flow or be expended Eliminate non-cash and accruals,Do No
2、t Just Divide by 12!,Developing a Cash Flow Plan for the Responsibility Centre,Generally managers are expected to prepare cash flow plans based on: Historical data Their program plans,Developing a Cash Flow Plan for the Responsibility Centre,Not all funds flow at once some costs are distributed over
3、 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 the Responsibility Centre,Such flows are predictable within limitations. e.g. salary dollars,Developing a Cash Flow Plan for the Re
4、sponsibility 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
5、 Plan for the 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
6、 Plan for the 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 flexibilityEnd result: Managers Expendit
7、ure Plan,Factors to take into account in building 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 tak
8、e into account in building 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 whi
9、ch may create delays.,Factors to take into account in building a cash flow plan,Timing of the maturity of investments or endowments in various funds;.,Factors to take into account in building a cash flow plan,Awareness of the timing of cash requirements to match them up with inflows, e.g. major capi
10、tal 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 Perf
11、ormance Reports,Managers Expenditure Plan,The Financial Analysis Process,Whenever possible gets comparative data: - for the organization over time, - for the organizations peers, and - for benchmarking organizations (if they exist). Organize the information and complete the analysis.,The Financial A
12、nalysis Process,Will compare financial performance to the Managers Expenditures Plan often input into organizational financial system,Sample Financial Report Cover Sheet Part One,Part Two,The uses of historical data,Why it is important? Developing comparisons year to year Understanding what has chan
13、ged and what remains the same Developing useful variance reporting based on historical data,An Example of the Use of Historical Data,93% of last years budget spent,46% of this years budget expended,Potential Year Savings = 312,000,Sometime historical data in non-monetary,Use of Average costs and cos
14、t formulae to project forecasts,Analyzing Encumbrances and Commitments,Key tool in governments to ensure that budgets do not go over approved limits,Analyzing Encumbrances and Commitments,“Financial commitments are obligations to outside organizations or individuals that become liabilities if and wh
15、en terms of exiting contracts, agreement or legislation are met.” CICA,Analyzing Encumbrances and Commitments,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 d
16、o not appear as either formal commitments in a cash balance sheet or liabilities in an accrual based balance sheet,Analyzing Encumbrances and Commitments,Positive uses: inform management of actual flexibility and spending plans Negative use: protect funds Danger of unspent funds at the end of the ye
17、ar,Developing 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/Forecast,Dividing by 12 hardly useful or generally no
18、t 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 Data,Key to provide financial information derived from current information, known changes and trends and announcement Comparison of data from
19、current year to prior years always useful,Translating and Interpreting Data,Usefulness of different perspectives Budget managers Financial advisor Organizational head Corporate financial advisor,Translating and Interpreting Data,Role of the challenge function Reporting that makes data relevant to ma
20、nagers and to decision makers: managements discussion and analysis (MD&As),Management Discussion and Analysis,Should provide basis for discussion and decision making Language should be business-oriented and not excessively detailed,Management Discussion and Analysis,Objective and easily readable ana
21、lysis of financial activities based on currently know facts, decisions or conditions,Management 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 hypot
22、heses they contain,Questions the Management Report must answer,Are we going to be within our budget allotments? Are we operating according to our budget plan?,Questions the Management Report must answer,How does our performance compare with relevant historical data? Does this performance mean that m
23、ore 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 Report must answer,What is the responsibility centre manager going to do about the negative variances? Are positiv
24、e 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 Report must answer,Do we have the needs and authorities to reallocate these funds? What does this information tell us about the perf
25、ormance of the manager in this unit? What does this information tell us about the long-term funding?,Reporting and Discussing Risk in Cash 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 perm
26、anently,Reporting and Discussing Risk in Cash 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 Cash Management,Other types of risk to consider: Inappropriate use of funds Surges or declines in dem
27、and leading to cost over-runs or under-usage Emerging and unanticipated issues: mad cow, SARS Financial reports should not originate the organizations development of risk but should reflect its overall management process,Risk of over-expending is sometimes graphic and clear.,Financial Performance Re
28、ports,Variance Reports: Ratios and Historical,Program Managers Input: explanations, plans and flexibilities,Cash Forecast Report: (Financial Review) by CFO:,Cash Forecast Report,Can take many forms: briefing notes, PowerPoint presentation, charts, graphs Should have some predictability in format and
29、 language,Cash 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 simil
30、ar units in the system,Cash 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 incre
31、ases 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 Report,Should be a regular submission to the senior management committee of the organization Should
32、move financial information, various background information, etc into the realm of text, ideas and integration,Cash 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 For
33、ecast 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 Report,Questions t
34、o 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 th
35、is enough to force us to take some action like removing him and finding some else.,Cash 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 organizat
36、ional head: steering towards decisions, reconciling differences,Some Solutions for Serious Cash Management Problems,Panic!,Some Serious Solutions for Serious Cash Management Problems,Prepare your story and a plan: read The Cash Management Games People Play Find ways to slow down spending where there
37、 is discretion Review commitments (both formal and informal) to determine flexibility to shut down or slow down,Some Serious Solutions for Serious Cash Management Problems,Reduce staff where this will work quickly and without further costs, e.g. severance Not filling positions Slowing down staffing
38、Delay orders, put them off until the next period or year,Some Serious Solutions for Serious Cash Management Problems,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
39、as a whole,Some Serious Solutions for Serious Cash Management Problems,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 Redistribution of Surpluses, Carry-Forwards etc,Huge ten
40、sion 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 Redistribution of Surpluses, Carry-Forwards etc,Danger o
41、f 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 Redistribution of Surpluses, Carry-
42、Forwards 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 be
43、haviour significantly,Setting the Rules for Distribution and Redistribution of Surpluses, Carry-Forwards 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,
