cash management

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how to maintain the in flows and outflows of firm

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Presentation Transcript

Cash Management : 

Cash Management “A Caribbean Reference Model” Graeme Hansen Public Finance Management Advisor, CARTAC 24 November 2004

Background : 

2 gjh/cartac Background Originated at the CAPFA/CARTAC Cash Management Workshop held in November 2003 in Grenada. Assumption of common origin for most budget and accounting systems. Regional “model” for reference and training that will promote common understanding of concepts, issues, etc. “Model” is dynamic and will evolve as feedback/experience informs.

Background (ii) : 

3 gjh/cartac Background (ii) Comprehensive, regional wide diagnostic data is limited, however, many countries have: Payment arrears (domestic and external). In some cases these are growing (or are uncertain about the level of their arrears). Multiple and substantial budget supplementaries (and virements) that do not meet criteria of “unable to be foreseen” and “unavoidable”. Unplanned borrowings. Substantial and sometimes unconventional “below-the-line” transactions. There are other symptoms including unreconciled/uncontrolled banks accounts but one or more of these “big four” are certain indicators of a cash management and other PFM problems. Often the problems only become a crisis when an economic downturn occurs.

What is Cash Management? : 

4 gjh/cartac What is Cash Management? Traditional view is that cash management is about ensuring there is enough cash in the bank to pay the bills on hand i.e. Cash is always available to meet claims on hand. Borrowing costs are minimized and within budgeted limits. Aggregate cash flows are within fiscal, monetary and legal limits.

What is Cash Management? (continued) : 

5 gjh/cartac What is Cash Management? (continued) The foregoing is true but requires: Sound comprehensive budgets that do not e.g. under provide utilities costs and other unavoidable commitments. Commitment control. Reliable and timely reporting, active monitoring and analysis and effective decision making. Active planning and control. Appropriate accountabilities that are enforced.

Terminology – singing from the same sheet of music! : 

6 gjh/cartac Terminology – singing from the same sheet of music! Commitment: Incurring of a legal commitment at the time it occurs e.g. purchase order or contract irrespective of when expenditure is to occur. A “certificate of funds” available should always be given prior to incurring the commitment. For ongoing commitments e.g. wages and salaries, many utility costs. For convenience wages and salaries, commitment is deemed to occur at the time payment is due. For utilities and the like it is deemed to occur when the invoice is received.

Terminology – singing from the same sheet of music! (ii) : 

7 gjh/cartac Terminology – singing from the same sheet of music! (ii) Encumbrance: Generally the same as commitment although in some systems where this term is used, commitments that result in expenditure outside the current financial year are not recorded. Expenditure: For the purposes of cash management, expenditure (payment) occurs when it is recorded in the books of account.

Terminology – singing from the same sheet of music! (iii) : 

8 gjh/cartac Terminology – singing from the same sheet of music! (iii) Outstanding commitment: Unexpended commitment i.e. at a point in time, the difference between commitments and expenditure. For convenience, at the beginning of the financial year, commitments expended during the previous years are not carried forward.

Terminology – singing from the same sheet of music! (iv) : 

9 gjh/cartac Terminology – singing from the same sheet of music! (iv) Unpaid bills Valid invoices and other liabilities (bills) that have been received and are not yet paid. Unless otherwise stated in contractual arrangements, the government is normally given 30 days to pay before the bills become overdue. To be due, bills must have: (i) a legitimate commitment; (ii) goods and services (and like obligations) have been supplied as specified; and, (iii) valid invoice (or other claim).

Terminology – singing from the same sheet of music! (v) : 

10 gjh/cartac Terminology – singing from the same sheet of music! (v) Arrears: Unpaid overdue bills or other legal obligations to pay. Question: Are these international definitions appropriate for the Caribbean? If not, what should they be replaced by?

Remaining agenda : 

11 gjh/cartac Remaining agenda Budget development. Commitment control. Responsibilities and Organizational Arrangements. Monitoring, analysis and reporting. Sanctions and incentives.

Budget Development : 

12 gjh/cartac Budget Development A soundly based budget is critical to successful cash management. However, cash management systems should be effective enough to ensure overall budget parameters are met even if the budget is not perfect!

Budget Development (ii) : 

13 gjh/cartac Budget Development (ii) Typical problems with budget development include: Optimistic revenue assumptions. Outstanding commitments not included. “Known unavoidable expenditure” underprovided to allow more new commitments e.g. utilities. Over optimistic/inflated project requirements. “Follow on” recurrent expenditure from capital projects not recognized. “One offs” built into base. Others ……..…

Commitment Control : 

14 gjh/cartac Commitment Control If you cannot control your commitments you cannot control your expenditure. Commitment requires same level of control, monitoring and analysis as expenditure. Not only an approved cash budget but also an approved commitment program. In some cases the commitment program may be the same as the expenditure (cash) program such as personal emoluments. For others such as for capital the two programs in any given month/quarter may be different eg.

Slide 15: 

15 gjh/cartac

Commitment Control (iii) : 

16 gjh/cartac Commitment Control (iii) Commitment programs are most often approved on a quarter-by-quarter basis. Limits set centrally must monitored at least monthly either through the IFMAS or vote book. Important to know not just that commitment limit has not been exceeded but what commitment (and expenditure) is planned for the remainder of the quarter/FY. Essential to have controls in place e.g. “Funds Availability Certificate” or similar to ensure contracts are not signed that exceed commitment limits.

Responsibilities and Organizational Arrangements : 

17 gjh/cartac Responsibilities and Organizational Arrangements Variations in arrangements across the region however as a general rule: Accounting Officers responsible for the preparation and management of their budgets within limits set. Financial Secretary responsible for coordination of budget preparation and overall execution.

Responsibilities and Organizational Arrangements : 

18 gjh/cartac Responsibilities and Organizational Arrangements However in many cases, There is no, or no functioning, Cash Management Committee. Confusion exists about day-to-day coordination/management responsibilities e.g. between Accountant General and the Director of Budget. In many cases there is close liaison between the two but this is not always the case and often depends on personalities! Heads of the Macro/Planning not routinely involved.

Indicative Cash Management Committee Composition : 

19 gjh/cartac Indicative Cash Management Committee Composition

Cash Management Committee : 

20 gjh/cartac Cash Management Committee Broad Terms of Reference: Advise Financial Secretary/Minister for Finance about measures necessary to “stay within the budget”. Review revenue, commitment and expenditure achievement and outcome projections for the remainder of the FY. Recommend/determine both commitment and expenditure limits for all agencies for the next quarter/remainder of the FY. Ideally should meet at the end of each month but at least quarterly to review and set limits. Essential that the revenue collectors, economic managers and forecasters participate.

Day-to-day Coordination : 

21 gjh/cartac Day-to-day Coordination Two common models in the region: Accountant General. Director of Budget. Where Accountant General has lead, (but not always) focus is on matching available cash with bills. Where Director of Budget has lead, generally greater focus on budget outcome. Worst situation is where responsibilities are not clearly defined and “things fall through the cracks”. Exercise is about planning ahead to avoid problems and to ensure budget is achieved.

Suggested Responsibilities : 

22 gjh/cartac Suggested Responsibilities

Suggested Responsibilities (ii) : 

23 gjh/cartac Suggested Responsibilities (ii)

Monitoring and Analysis : 

24 gjh/cartac Monitoring and Analysis Monitoring and analysis is ongoing and an extension of budget development. Annual tasks: Agency annual (quarterly) commitment forecasts. Agency annual (monthly) expenditure projections. Annual commitment program.

Monitoring and Analysis : 

25 gjh/cartac Monitoring and Analysis Quarterly tasks: Review of revenue, commitments and expenditure and set targets/limits for next quarter. Quarterly Report to the FS/Minister/Cabinet. Advice to Accounting Officers re new limits. Monthly tasks: Agency report of achieve and forecasts. Analysis and preparation of position report. Issue of any target/limit changes.

Timing - some suggestions : 

26 gjh/cartac Timing - some suggestions

Monitoring and Analysis : 

27 gjh/cartac Monitoring and Analysis Monitoring and analysis is a daily job although formal review/reporting is usually done on a monthly basis (more frequently if situation requires). Based upon: Actual revenue, commitment and expenditure measured against planned. Historical patterns to understand e.g. seasonal influences. Simple prorata projections. Agency forecasts Analyst (and cash management committee) knowledge and liaison with ministry/dept.

Monitoring and Analysis (ii) : 

28 gjh/cartac Monitoring and Analysis (ii) Timeliness is critical to effectiveness. Perfection can be the enemy of progress! Comprehensiveness important but rationing of effort based on “materiality”. Decision makers must be able to quickly understand the issues and the options proposed. Different decision makers have different preferences but sometimes tools such as graphs are highly effective provided they are accompanied by concise narrative and, as necessary, numbers.

Graphical Analysis - Illustration : 

29 gjh/cartac Graphical Analysis - Illustration

Illustration (ii) : 

30 gjh/cartac Illustration (ii) In this case the graph shows cumulative totals because these best identify emerging trends. Pro rata line shows path were same expenditure is expected to occur each month. The pro rata “curve” is useful reference. Historical line based % achievement previous years applied to current budget. 1 – 2 years usually enough and avoid distortions. Agency forecast critical because; (I) they should have best knowledge; and, (ii) it is the “accountability line”

Budget Discipline - Incentives and Sanctions : 

31 gjh/cartac Budget Discipline - Incentives and Sanctions Without budget discipline cash management inevitable fails. Traditional sanctions and incentives have limitations. In most cases incentives are the converse of the sanctions e.g. reduction in commitment limits becomes increase in limits . It is one thing to decide that expenditure should be restricted but how do you implement such a decision?

Sanctions - Examples : 

32 gjh/cartac Sanctions - Examples

Sanctions : 

33 gjh/cartac Sanctions Sanctions (and incentives) are likely to be effective if: Authority is unchallenged. They can be implemented quickly (timely). They cause demonstratable disadvantage/hurt (impact). They do not discriminate (fair). In most cases a menu of sanctions (and incentives) is required to best suit the situation.

Illustrative Sanction Effectiveness (High, medium and low rating will depend on the situation) : 

34 gjh/cartac Illustrative Sanction Effectiveness (High, medium and low rating will depend on the situation)

Requirements : 

35 gjh/cartac Requirements Effective cash management requires: Systematically anticipating the future. Good liaison and sharing data/information across organization boundaries. Timely actions e.g. analysis and notification of limits. Clear understanding of responsibilities and accountabilities. Sound accounting systems and controls. Other?

Best Practice in the Caribbean – Performance Measures? : 

36 gjh/cartac Best Practice in the Caribbean – Performance Measures? Results measured by success with the “big four”. Established, documented, understood and used procedures for cash management including a cash management committee (or similar). Systematic, timely and effective monitoring, analysis and reporting (and decision making). Budget disciplne including the effective application of sanctions where necessary.

The “Reference Model” : 

37 gjh/cartac The “Reference Model” The reference model will be published in due course. It is important that it is relevant to countries in the region although one size may not fit all, all of the time. If you require workshops can be conducted in your country or region as well as technical support.

Slide 38: 

38 gjh/cartac Thank you.