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!


• Generally managers are expected to prepare cash flow plans based on:– Historical data– Their program plans


• 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.


• Such flows are predictable within limitations. e.g. salary dollars


• 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


• 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


• 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


• 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.


• Timing of the maturity of investments or endowments in various funds;.


• 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


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


• “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


• 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


• 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


• Objective and easily readable analysis of financial activities based on currently know facts, decisions or conditions


• 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?


• 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?


• 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?


• 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?


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


• Key risk in cash management is over-expenditure of budget or failure to fully use funds available and needed


• 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


• 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


• 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.


• 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


• 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


• 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


• 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.


• 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


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


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


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



• 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.



• 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



• 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

cash management: part 2: from a cash flow plan to process governance andrew graham queens university...

Documents

cash flow plans

cash flow plan timing

cash flow plan awareness

cash flow plan anticipation

funds flow

different cash flow

year cash management

purposes slide