treasury_managementgwscpav1

Best Practices in Treasury Management

Mary Karen Wills, Leonard Williams & Ryan Byrd

December 2, 2015

Outline

• Treasury Function is evolving

• What CFO’s are concerned about?

• Financial Performance Metrics

• Financing Mechanisms

• Budgets

• Asset Management

• The Use of Fund Accounting

• Challenges of International Treasury Management

Treasury Function is evolving-

• Past Focus

• Strategic-5%

• Analyical-15%

• Operational-80%

• Current Focus

• Strategic-50%

• Analyical-30%

• Operational-20%

What CFO’s are concerned about?

• Cash management optimization

• Implementing or Improving Cashflow

• New or improved Technology/Systems

• Managing Treasury risks in Emerging markets

• Understanding how changes in regulations impact their

organization

Best Practice- Treasury Department

• Often viewed as a hub and spoke relationship with all

revolving around the Treasury Department

• Board of Directors

• Internal Stakeholders

• Financing Institutions

• Donors

• Banks

• Awarding agencies

• Regulations and Compliance

Best Practice Treasury Department-cont

• Organization & Structure

• Strategic Focus

• Staffing• Level

• Skillsets

• Centralized vs decentralized

• Regional treasury function vs non-regional

• Across the Board Support

• Team Members

• Liquidity and Working Capital Management

• Cash Forecasting

• Netting

• Pooling

• Reporting structure and metrics


• Technology

• Integrated data

• Straight through processing

• Systematic Controls

• Stress the appropriate use of electronic payments

• Policy Framework

• Implement a hierarchy of formal policies, procedures and desk

instructions should be in place

• Particular emphasis for international operations should be

developing local procedures to those polices upstream


• Treasury Metrics

• Develop key metrics to gauge and analyze treasury performance

• Set overall objectives for the function

• Determine what should be measured

• Establish processes to utilize technology to gather pertinent information

• Create a dashboard to provide a view of key metrics

• Risk Management

• Develop strategies to identify, measure and manage risks for:

• Operational

• Liquidity

• Market

Best Practice Treasury Department-How to

Get There

• Develop a plan for any changes needed• Prioritize Resources

• Link Dependencies to Risks

• Establish timeline and milestones

• Gain buy-in for the benefits

• Roll out plan

• Timely and consistent communication updates to team

Financial Performance Metrics

• Statement of Financial Position Indicators

• Ability to Manage Debt

• Organizations liabilities as a percentage of total assets if gets close to the

50% mark, then could jeopardize the delivery of programs and services

• Ability to Steward Facilities

• If an organization owns property and equipment, there must be adequate

dedicated reserves to replace or repair

• Appropriate Liquidity

• As a general rule less than three months of cash is tight for non profits

Financial Performance Metrics-cont.

• Statement of Activities Indicators

• Revenue Reliability

• An organization’s track record of bringing in recurring dollars, on an

unrestricted operating basis, year after year.

• Need to predict a level of income with a fair amount of certainty, based on

historical performance

• Consistent Surpluses

• Positive operating results (unrestricted revenue consistently exceeding

expenses) are an indicator of strong financial management

• Full Cost Coverage

• Covering the full costs of doing business includes the direct and indirect

operating expenses as well as depreciation on fixed assets and reduction in

any debt principal which are traditionally covered by surpluses. Surpluses

should can also contribute to savings and strategic opportunities

Financing Mechanisms

• Loans

• Not for profits can apply for a bank loan but will need collateral or

someone to guarantee the loan, and some evidence of a viable

business

• The most important information to have when applying for a loan

is recent, accurate financial information about the organization, a

plan for the amount and use of funds, a repayment plan

• Lines of Credit

• A line of credit allows the organization to borrow up to a certain

sum for a specified period of time

• May want to apply for a line of credit before you need it for a

safety net

Financing Mechanisms-cont

• Federal Letters of Credit (FLOC)

• The Letter of Credit is a payment method that authorizes award

recipients to request an electronic drawdown/advance of funds to

pay for award costs.

• Is the preferred method for federal financing of contracts, grants

and cooperative agreements for non-profit organizations.

• Awardees must minimize the time elapsing between draw down of

Federal funds and disbursement by the awardee in accordance

with Treasury regulations at 34 CFR 74.22(a) for nonprofit

organizations.

• USAID ADS 303 and 636 govern the process for USAID grantees

Financing Mechanisms-cont

• Federal Letters of Credit (FLOC)-cont.

• The LOC grantee completes and submit a “SF 1199A-Direct

Deposit Sign-up Form” and “Division of Payment Management

Payment Management System (PMS) Access Form to establish a

PMS account at US Department of Health and Human Services

(DHHS).

• Access codes to the PMS are then provided to the organization

after DHHS has reviewed the information

• The obligated funding will be posted to the PMS/LOC account and

will then be available for drawdown via the internet by the grantee

Financing Mechanisms-cont.

• Drawdowns for Federal Awards

• The US Government disburses funds to grantees in two ways:

• By advancing funds

• By reimbursing partners for expenses after they have been incurred

• To request funds, a SF -270 “Request for Advance or

Reimbursement” must be completed and submitted.

• Initially, the organization will limited to requesting funding advance

one month at a time.

• Each request must be for the amount you estimate the

organization will spend in the upcoming 30 day period

• The drawdown of Federal funds is for immediate needs only

Budgets

• Budget Planning Issues

• Zero-Based versus Incremental Budgeting

• Types of Budgets

• Steps in Preparing Budgets

• Capital Budgets

Budget Planning Issues

• A budget is a compilation of the plans and objectives that covers all

phases of operations for a specific period of time

• Lead-time for grant requests and other multiyear programs must be

factored into the budgetary planning process

• An effective budget should establish criteria that would signal

management if a change is needed or if a course of action should be

refined or altered

• Staff and management accountability is an aspect of budgeting:

responsibility should be associated with those that are actually

capable of realizing the goals

• A budget’s usefulness is diminished without active awareness and

participation of those carrying out the organizational mission

Zero-Based versus Incremental Budgeting

• The organization starts from zero by assuming that no program is

necessary and no money need to be spent.

• Involves an orderly evaluation of all elements of revenue and

expense

• Each program must be examined to justify its existence as well as

effectiveness as compared to alternative programs

• A not-for-profit’s historical costs are the usual base from which budget

planning starts

• An organization must decide whether its budget is to be based on

measurable and predictable statistics or only on good guesses

Types of Budgets

• The basic budget is a comprehensive look at the entire

organization’ s overall projection of the revenues or

financial support and its expected expenditures

• Specialized or supplemental budgets can provide a

specific focus on fragments of financial activity relative to

individual programs or revenue centers.

• The master budget coordinates all of the financial

projections in the organization’s individual budgets in a

single organization-wide set of budgets for a time period.

• A rolling budget continually forces management to think

concretely about the upcoming 12 months

Steps in Preparing Budgets

• The revenue budget should be the starting point in a

budget planning process because program delivery will

depend on the forecasted level of revenue.

• The next step is program or project budget

• How much should be offered to support the estimated level of

service revenue?

• Fund-raising goals will also determine programmatic

service levels because service oriented revenues will not

finance all program offerings completely

Capital Budgets

• Capital budgeting is the process of making long-term

planning decisions for investments

• The stages of capital budgeting include:

• Identification

• Distinguishing which types of capital expenditures are necessary to

accomplish the organizational objectives

• Search

• Explores several alternative capital expenditures investments that will achieve

organizational goals

• Information acquisition

• Considers the predicted costs and consequences of alternative capital

investments

Capital Budgets-cont.

• The stages of capital budgeting include:

• Selection

• Projects are chosen for implementation

• Financing

• Project funding is obtained either through internally generated cash or through

debt from the capital markets

• Implementation and Control

• Puts the project in motion and provides for ongoing monitoring of investment

performance

Asset Management

• Cash Flow Planning

• A/R

• Monies owed to the organization by another party

• Monitor A/R with weekly cash recounts

• 31 days of A/R means lost earning and more dependency on credit line

• A/P

• An outstanding bill from a vendor that the organization has obligation to pay

• Don’t pay early-utilize electronic invoice payments when available

• Pipeline

• Shows all the prospects being cultivated and potential timing

• Pipeline is very fluid-is not a fixed income forecast

• Attaching a “likelihood” or probability indicator can be helpful in the current

and out year budgeting process.

Asset Management-cont.

• Endowment Fund Management

• Defined as an investment fund set up by the organization in which

withdrawals from the invested capital are used for on-going

operations or other specified purposes. Endowments are funded

through donations.

• Need to be governed by:

• Investment Policy which dictates the types of investments the manager can

make and how aggressive they can be in meeting return targets

• Withdrawal Policy determines the amount an organization can take from the

fund in each period which is driven by the organization needs as well as

balance in the fund

• Fund Usage Policy ensures that the money from the fund is being used

properly and for the resources set out by the fund

The Use of Fund Accounting

• Operating Fund• Also known as the unrestricted current fund, this fund is used to record

organizational activity that is supported by which governing boards have

discretionary control

• Restricted Current Funds• These fund types are used to record organizational activities that are supported by

resources whose use is limited by external parties to specific operating purposes

• Plant Funds• Some not for profit organizations record plant and equipment in a plant fund

• A plant fund can be a single group of accounts or

• A plant fund may be subdivided into the following sub fund account groups:• Unexpended plant funds, funds for renewal and replacement, funds for retirement of indebtedness and

investment in plant funds

The Use of Fund Accounting-cont.

• Loan Funds• Are used to account for loans made to constituents and those resources available

for loan purposes.

• Assets for loan funds may be provided by donors, granting agencies or designated

by governing boards

• Fund balances of loan funds represent net assets available for lending

• Annuity and Life-Income Funds• May be used to account for resources provided by donors under various kinds of

agreements in which the organization has a beneficial interest in the resources but

is not the sole beneficiary

• Agency or Custodian Funds• Are used to account for resources held by the organization as an agent for

resource providers before those resources are transferred to third party recipients

specified by the resource providers.

Challenges for International Treasury

Management

• Making/Transferring Payments-Challenges

• Short lead time to prepare funding mechanisms

• Sponsoring agency deployment schedules and expectations

• Emerging needs in-country

• High volume cash needs

• Inadequate, insecure, and/or weak banking systems and

structures

• Risky financial or political conditions

• Employment status of in-country personnel


Management-cont.

• Making/Transferring Payments-Solutions

• Maximize Field/Cash Advances

• Payment to custodian by check

• Direct wire/EFT to foreign bank account

• Utilize for operations, including in-country payments for contractors and

foreign nationals

• Contract with a “logistics” firm

• Expertise in foreign legal, regulatory and general business environment

• Branches/offices in the field

• Payments can generally be made by wire or check

• Direct Deposit

• Salaries and expenses for US citizens-ACH to local account with subsequent

wire to employee foreign bank account if applicable


Management-cont.

• Currency Exchange Fluctuations

• A organization’s foreign exchange policy should:

• Include definitions of various exposures

• Outline hedging objectives and

• Establish internal controls associated with the foreign currency risk

management function

• The design of the organization systems and processes should:

• Help natural offsets and monitor cross-border payment flow

• Monitor for cross-border payment flows, intercompany payments and currency

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