Cash Management: Part

1: From Concepts to
Developing an Adjusted
Budget
Andrew Graham
Queens University
School of Policy
Studies
 Definitions

Cash, budget, treasury and

liquidity can all get confused at this
point
No one term exists for the
management of in-year budgets
 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
 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
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
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
What is so Important about Cash
Management?
An organizations 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
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
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
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
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
What is so Important about Cash
Management?

Resource management serves

as an important performance
indicator for managers and
their organization as a whole
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
 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
 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.
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?
 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
 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
 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.
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
 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.
 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
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
 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.
 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
 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
From Cash Flow to Cash
Forecasting: Financial
Statements
 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.
 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.
 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
 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?
 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?
 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?
 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?
Elements of a Cash Management
System

An appropriated budget
Build in changes and
modifications to the approved
budget to create an adjusted
budget
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
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
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.
 Roles and Responsibilities

Senior management must set

budgets and program direction
Line managers must manage the
resources they are given to carry
out programs
 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
 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
 Roles and Responsibilities

Senior managers must

determine what actions to take
based on these two sets of
inputs.
 The Cash Management Cycle
Assess
Budget Budget
Implicatio Appropriat Cash
ns for ed Requirement
Next Year s

Hold
Adjusted Backs/Reser
Budget ves/
Plan for Adjustments
Year Adjusted
Budget

Senior
Managem
ent Budget Plan
Direction: for Year
Reallocati
on

Senior Reporting
Managem Results:
ent Actual vs
Reporting Plan:
and Financial
Managem Variance and
Review ent Reports Operations
Discussion and
and Analysis
Analysis
 Cash Management
Process
Expenditure Plans of Financial Performance Reports
Organization: budget,
program

Variance
Adjustment Reports:
s and Ratios and
Modificatio Historical
ns to Plans

Senior Program
Managem Managers
Cash Forecast
ent Input:
Report: (Financial
Review explanations,
Review) by CFO:
and plans and
Decision flexibilities
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
 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
 Impediments to establishing a
base budget

Senior managers withhold

authorities pending further
changes
Dependency on external
funding sources, e.g.
intergovernmental transfers
 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
 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 7,500,000
and Equipment
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.
 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
Allotment DMO Policy Operations Inspection CIO CFO
and Services
Services
FTEs 150 150 1200 1100 300 300
Salaries 7,639,000 7,639,000 61,116,579 56,023,531 15,279,144 15,279,144
[1]
Overtime 0 250,000 1,000,000 2,335,000 500,000 0
Operating 3,000,000 2,000,000 20,000,000 24,000,000 11,000,000 4,766,850
and
Maintena
nce
Grants 2,000,000 3,600,000 0 0 0 0
and
Contribut
ions
Capital 500,000 300,000 2,000,000 2,000,000 2,500,000 200,000
Expendit
ures

[1] Allowances are automatically d

 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
 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
 LINE ITEM BUDGET CHANGES ADJUSTED
This fiscal BUDGET
year This fiscal
year
SALARIES 3,500,00 750,000* 4,250,00
0 0
OVERTIME 500,000 (100,000 400,000
)**
TRAINING 250,000 75,000 325,000
TOTAL STAFF 4,250,00 725,000 4,975,00
COST
0
*Salary adjustments from collective bargaining = 400,000 0
plus 350,000 from DMs special youth employment funds
** Departmental target to reduce overtime your share is
100K
Special central agency funding one year only for
technology training.
Continued in Cash
Management: From
a Cash Flow Plan
to Process
Governance