1. Andrew Graham Queens University School of Policy Studies
Cash Management: Part 1: From Concepts to Developing an Adjusted Budget
Andrew Graham
Queens University
School of Policy Studies

2. Definitions
Cash, budget, treasury and liquidity can all get confused at this point
No one term exists for the management of in-year budgets

3. 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

4. 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, 2002, Research and Library Services, Northern Ireland Assembly

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. What is so Important about Cash Management?
Resource management serves as an important performance indicator for managers and their organization as a whole

13. 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

14. 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

15. 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.

16. 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?

17. Focus on a few critical aspects of performance
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

18. Explain other factors critical to performance
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

19. 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.

20. 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

21. 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.

22. 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

23. 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

24. 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.

25. 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

26. 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

27. From Cash Flow to Cash Forecasting: Financial Statements

28. 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.

29. 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.

30. 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

31. Is the organization on budget?
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?

32. Is resource use matched to objectives?
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?

33. What is the significance of these shifts?
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?

34. How are managers performing?
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?

35. Elements of a Cash Management System
An appropriated budget
Build in changes and modifications to the approved budget to create an adjusted budget

36. 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

37. 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

38. 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.

39. Roles and Responsibilities
Senior management must set budgets and program direction
Line managers must manage the resources they are given to carry out programs

40. 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

41. 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

42. Roles and Responsibilities
Senior managers must determine what actions to take based on these two sets of inputs.

43. The Cash Management Cycle
Assess Budget Implications for Next Year
Budget Appropriated
Cash Requirements
Hold Backs/Reserves/ Adjustments
Adjusted Budget Plan for Year
Adjusted
Budget
Senior Management Direction: Reallocation
Budget Plan for Year
Reporting Results: Actual vs Plan: Financial and Operations
Senior Management Reporting and Review
Management Discussion and Analysis
Variance Reports and Analysis

44. Cash Management Process
Expenditure Plans of Organization: budget, program
Financial Performance Reports
Variance Reports: Ratios and Historical
Adjustments and Modifications to Plans
Senior Management Review and Decision
Program Manager’s Input: explanations, plans and flexibilities
Cash Forecast Report: (Financial Review) by CFO:

45. Expenditure Plans of Organization: Budget, 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

46. 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

47. Impediments to establishing a base budget
Senior managers withhold authorities pending further changes
Dependency on external funding sources, e.g. intergovernmental transfers

48. 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

49. Allotment Original Budget
Full Time Equivalents
3,200
Salaries
162,977,546
Allowances
8,945,800
Overtime Salary Dollars
4,085,000
Operating and Maintenance
64,766,850
Grants and Contributions[1]
5,600,000
Capital Expenditures[2] – Construction and Equipment
7,500,000
Total All Allotments
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.

50. 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

51. Allotment
DMO
Policy
Operations and Services
Inspection Services
CIO
CFO
FTEs
150
1200
1100
300
Salaries[1]
7,639,000
61,116,579
56,023,531
15,279,144
Overtime
250,000
1,000,000
2,335,000
500,000
Operating and Maintenance
3,000,000
2,000,000
20,000,000
24,000,000
11,000,000
4,766,850
Grants and Contributions
3,600,000
Capital Expenditures
300,000
2,500,000
200,000
[1] Allowances are automatically distributed in the same way.

52. 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

53. 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

54. LINE ITEM
BUDGET
This fiscal year
CHANGES
ADJUSTED BUDGET
SALARIES
3,500,000
750,000*
4,250,000
OVERTIME
500,000
(100,000)**
400,000
TRAINING
250,000
75,000¹
325,000
TOTAL STAFF COST
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.

55. Continued in Cash Management: From a Cash Flow Plan to Process Governance