How does Cash Management and Forecasting Differ from Cash and Appropriation Control - PowerPoint Presentation

1. How does Cash Management and Forecasting Differ from Cash and Appropriation ControlMark SilinsTCOP Advisor

2. ContentObjective of Cash Management and ForecastingObjective of Cash and Appropriation ControlCharacteristics of the Two ActivitiesConvergence of the Two ActivitiesWhy Forecasting and Control should not be a Single Activity 2

3. What is the objective of cash management and forecasting?Cash Management has the objective of ensuring sufficient cash is available to execute the budget Cash should be available just-in-time, neither too early, which results in idle cash balances, or too late, which results in unnecessary borrowing costs or arrearsCash Forecasting is the process of estimating cashflows in the future to assist in targeting the cash balance

4. Debt and Financial Asset FlowsRevenue Seasonality Tables Ministry Cash Plans Capital Project PlansINPUTS(1)Integrating the cashflows and analysing the divergence to actuals for the year(2) Extrapolating forward for the full year based on the cashflows achieved year to date(3)Scenario AnalysisAnalysisFinal Reports for Stakeholders ReportingSimple cash forecasting model

5. What is the objective of cash and appropriation control? Maintaining budgetary control within the appropriation ceilings is the key objective in the yearTo achieve this each ministry, department and agency must adequately plan cashflows, commitments and payables and ensure warrants/allotments are not breached during the year Ultimately all of this has the focus of contributing to the efficient and effective delivery against budgetary objectives

6. Cash and appropriation reporting and control6

7. The characteristics of cash management and forecastingSupported by models – the sophistication of which can improve over time Typically undertaken in excel or specialized third party software to allow multiple models to operate and user defined reports to be produced 80/20 rule applies – near enough is good enough. No need for exact calculations. The focus should be on the major cashflowsBuffers used to protect cash balance against forecasting errorsThe goal is to actively manage the “cash balance”. Rough and fine tuning becomes possible as access to shorter term financial instruments comes into play. Refer to Mike Williams’ presentation

8. The characteristics of cash and appropriation controls Protecting the integrity of the parliamentary approval processControls are absolute – so reporting must be exact Supported by timely reports not modelsUsed to undertake statutory reporting but also to monitor budget execution by ministries, departments and agenciesData is normally entered into, and reports produced from, a (statutory) system – Financial Management Information SystemImportant to ensure financial data is verifiable from an internal (management) control and audit perspectiveForms the basis of budget execution reporting and financial statement reporting on a cash basis - including budget reporting and IPSAS 2 cashflow statements

9. Where do the two processes converge?Forecasting helps inform where issues with cash controls may occur, for example, imminent breaches in warrantsActual cashflow information is fed into the forecasting models to allow recalibration and extrapolation of the models to adjust for variations to the original forecastA good model grows organically during the year based on the variations between the forecast and actuals – it is adjusted to reflect the evolving position and should not be locked into the original budget assumptions Forecasting and cash control need more than cashflow information – tracking commitments and payables enhances information for both forecasting and control

10. Integrated budget execution (payment)process for cash forecasting and cash controlStage 2Purchase Order (legal obligation)Stage 1Decision to Purchase- Pre-commitmentStage 3Goods or Services DeliveredLiability Recognized- (financial obligation) Stage 6Payment Made on the Due DateFunds Control/Budget Commitment- Sets aside funds so that money can not be spent for other purposesAccrual - Accounts payable - Invoice matched to purchase order/commitment Payment made on due date recognized both on an accrual and cash basis Stage 4Correctly Rendered Invoice received Requisition Stage- Likely to involve tendering processes based on the value of goods and services to be purchased Stage 5Payment Pending in Accounting Systems based on Due date(Possible) Stage 7Budget ArrearsPayments are overdueYesNo

11. Monthly forecast Updated daily and weekly - structural FocusAnnual Forecast updated daily, weekly and monthly - structural focusWeekly forecast Updated daily - liquidity focusDaily Actuals compared to Forecast - liquidity focusHow daily actual cash flows link into forecastingWhile cash forecasting is ultimately focused on the short-term cash position, this also provides important early warning regarding structural issues in the budget and the underlying cash surplus/deficit target in the budget forecast. Monitoring the likely impact of variances in actual against the forecast is therefore very important

12. What happens when forecasting and controls are combined into a single process?Where you mix two processes that have very different objectives you often dilute the results for both processes or one of the two becomes dominantIn this case, we frequently see cash controls dominating the process undermining the integrity of the forecasting systemIdeally the budget should be executed to achieve the best results for government, not dictated by central cash controlsIn the past imperfect information due to timing issues with processing and reporting and lack of an FMIS frequently resulted in cash rationing. This combined with the absence of access to liquidity resulted in the Treasury controlling cash releases tightly centrally Forecasting cash spending is not required if you centrally control cash releases and spending – ROSPICE. However, will this impact service deliver and budgetary outcomes? Forecasting revenues will always be required given the external nature of the sources and the factors that can influence the timing of receipts

13. What happens when forecasting and controls are combined into a single process? (2)Traditional ROSPICE is focused on central controls not decentralized spending based on needsThis type of top down approach will interfere with a responsive budget execution process. For example all cash is released as 1/12th each month or 25% for the quarter. What happens where you need to purchase medical supplies 12 months in advance, or invest in a large capital item?In such cases the releases must accumulate until sufficient funds are available in the cash releases. Therefore spending clusters towards the end of the year and is not made when the MDA needs the funds eg replacement of an ambulance needed in month one but adequate funds only accumulate in month nine. If cash rationing is also a feature the situation for MDAs is more dire Modern FMIS today often see cash controls fully devolved to MDAs who register requisitions, commitments, payable and payments. All of these ensure strong cash and appropriation control as nothing is accepted in the FMIS unless funds are available Cash management and forecasting can use the improved information in FMIS to allow the budget to be executed according to needs13

14. Supplementary Budgets (revisions) and cash forecastingSupplementary budgets should be informed by the evolving revenue position and forecast and through a realistic assessment of spending needs verses existing commitments Budget revisions without a focus on the reality will result in an accumulation of arrears (late payments)Budget Revisions to reduce spending late in the year are frequently ineffective because it is too late to reduce commitmentsThis is why forecasting is so important – it should help to provide early warning regarding structural issues with the budget – eg the forecast shows systemic issues in the budget which will increase the budget deficit unless offsetting actions is taken Budget revisions will also have a top down impact on forecasts

15. Most MDA forecasting for spending is actually relatively simply Flows with Certain Timing Salaries/PensionsSocial benefitsSubsidiesGrantsDebt Servicing amortization and interestUtilitiesCentralized procurementsResidual Elements requiring planning and forecastingOther goods and services Capital spendingIt is the revenues both tax (90%) and non-tax (10%) which create the biggest challenge in the forecast

16. Improving cash planning and how it can support forecasting Procurement Plans and Cash Plans – submitted by MDAs based on expected needs not centrally determinedCommitments based on plans in FMISEnsuring goods and services are recorded as received (payables) in FMISDue Date – if 30 days, planning and the forecast know with certainty what will be paid for the next 30 days. Ideally this is in FMIS Payment on the due date by the FMIS No arrears will accumulate if cash forecasting ensures cash is available just-in-time to pay on the due date

17. Integrated budget execution (payment)process optimising information for cash forecasting and cash controlStage 2Purchase Order (legal obligation)Stage 1Decision to Purchase- Pre-commitmentStage 3Goods or Services DeliveredLiability Recognized- (financial obligation) Stage 6Payment Made on the Due DateFunds Control/Budget Commitment- Sets aside funds so that money can not be spent for other purposesAccrual - Accounts payable - Invoice matched to purchase order/commitment Payment made on due date recognized both on an accrual and cash basis Stage 4Correctly Rendered Invoice received Requisition Stage- Likely to involve tendering processes based on the value of goods and services to be purchased Stage 5Payment Pending in Accounting Systems based on Due date(Possible) Stage 7Budget ArrearsPayments are overdueYesNo

18. ConclusionsWhile cash forecasting and cash control both focus on cashflows, they have different objectives and requirementsDifferent processes are required for each activity given the differences – ideally they should not be integrated There is also a risk of MDAs gaming the forecast if they think it will be used by MoF to centrally control spending decisions Where countries integrate the two processes control tends to dominate and directly impact service delivery and resultsThe role of the modern Treasury in many cases should see a shift from central cash controls (this shifts into FMIS and to MDAs) to cash forecasting.