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Executive Cash Management
Maintaining solvency
Tools for Decision-Making
Executive Cash Management © Mission Systems, Inc. 2015
2Executive Cash Management
Fred Marshall, Ph.D, P.E.Mission Systems, Inc.
(360) 642-2073(503) 791-5773
Executive Cash Management © Mission Systems, Inc. 2015
3Classical Definition: Cash Management
“The corporate process of collecting, managing and (short-term) investing cash. A key component of ensuring a company’s financial stability and solvency.”
Executive Cash Management © Mission Systems, Inc. 2015
4Examples of staff-level cash management
• Choosing appropriate institutions for holding cash – a small part. (Assumes you have cash).
• Getting the best rates of return - a small part.(Assumes you have cash).
• Managing cash flow - a refinement once you get going.
Executive Cash Management © Mission Systems, Inc. 2015
5Executive Cash Management
• What are our cash objectives?
• How do we determine those objectives?
• How do we manage meeting those objectives?
• How do we track them?
Executive Cash Management © Mission Systems, Inc. 2015
6Executive Cash Management
Setting objectives:
• Is a risk-balancing exercise.
• Is a key element in budget making
• Challenges affordability
Executive Cash Management © Mission Systems, Inc. 2015
7Executive Cash Management
Bringing it Home
• Cash reserves are like savings accounts• The more you save today, the less you can spend today• There’s always conflict / tension – a good thing• You can’t save if expenses match revenues• To create reserves, there must be a budget surplus
Executive Cash Management © Mission Systems, Inc. 2015
8Objective-Setting – Working Cash
• The annual budget is a plan to come out OK at year end
• Timing of expenses and revenues causes fluctuations
• Fluctuations can cause you to run out of cash.
• “Working cash” reserve to buffer cash flow.
9Objective-Setting – Working Cash
• Working cash reserve is 6 weeks of expense or 12.5%
• In Washington State, a 12.5% requirement – no choice
• For a $1M budget = $125,000 on January 1st
• Objective-setting is easy as there’s no choice
• With no choice, it takes priority over any other reserves.Executive Cash Management © Mission Systems, Inc. 2015
10Objective-Setting – Emergency Reserve• Revised Code of Washington
RCW 35A.33.145 Contingency fund — Creation.
• Every code city may create and maintain a contingency fund ……
PROVIDED, That the total amount accumulated in such fund at
any time shall not exceed the equivalent of thirty-seven and
one-half cents per thousand dollars of assessed valuation of
property within the city at such time. Executive Cash Management © Mission Systems, Inc. 2015
Objective-Setting – Emergency Reserve
• Emergency Reserve is a form of “ready insurance” for unforeseen circumstances. • The ability to grow Emergency Reserves means that the
current Reserve buys time to recoup.• The need for an Emergency Reserve is only offset by
insurance policies to a limited degree. e.g. Equipment failures are generally not insured.• Among other reserve amounts, the Emergency Reserve
may have the lowest relative priority.
Executive Cash Management © Mission Systems, Inc. 2015
11
Executive Cash Management © Mission Systems, Inc. 2015
12Short-Lived Asset Replacement ReserveImagine the budget split into categories:
1. Expenses built into the budget (Operations and Maintenance )(Current cash flow requirements)
2. Expenses for mid-sized and short-lived asset replacement (“depreciation”)
(Both current and, future cash flow “savings”)
3. Large and long-lived asset replacements via debt financing.
(Implies future cash flows for debt service)
Executive Cash Management © Mission Systems, Inc. 2015
13Short-Lived Asset Replacement Reserve• “Seat of the pants”, pay as you go approach is all
too common
• Yet, large cash requirements loom that won’t be debt-financed
• Selecting the assets and managing for their replacement is a real management task
• Cash position management is a necessary element
Executive Cash Management © Mission Systems, Inc. 2015
14Short-Lived Asset Replacement Reserve
• The challenge is to balance cash requirement vs. asset replacement
• Easy to lose the picture of why that cash is there
• Too much saved-up cash becomes attractive
• Smooth the cash buildup and reductions!
Executive Cash Management © Mission Systems, Inc. 2015
15 Short-Lived Asset Replacement Reserve
• 2nd in priority
• Below working cash reserve because working cash is required!
• Above of emergency reserve because the need is “provable”.
Executive Cash Management © Mission Systems, Inc. 2015
16Reserves: Visibility and Protection
• Formalize the objectives
• Formalize financial reporting
• Make reserve management an integral part of budgeting
Executive Cash Management © Mission Systems, Inc. 2015
17What Should We Expect?
• There are up-front challenges when reserves don’t exist
• Expenses have been “pushed forward”
• Once working cash and emergency reserves are established and maintained, there would be no ongoing contribution from operations.
• If short-lived assets can be funded according to the annualized demand, then it becomes “institutionalized” in the budget – much like an ongoing expense: e.g. “Electricity”.
Executive Cash Management © Mission Systems, Inc. 2015
18Approaches
• Build working cash reserve first. Not starting from zero. It may already be there.
• Build emergency reserve and short-lived asset reserves in parallel. Not starting from zero. Some short-lived asset replacement has always been in the budget.
• Translate the budget from ad hoc replacement to planned replacement.
Executive Cash Management © Mission Systems, Inc. 2015
19It’s All Good
• Cash in the General Fund is fungible. i.e. it doesn’t matter what we call it or what labels we attach.
• BUT: with focus on each objective, it’s much more likely to succeed.
• Opportunity for meeting cross-reserve objectives with less total cash. An opportunity for balance.
Executive Cash Management © Mission Systems, Inc. 2015
20Available Tools
• Generate and manage Short-Lived assets with:• Advanced 50-yr cash requirements projection FOR
VISIBILITY• Frequent updates allow shorter horizon• Cash flow projections• Cash injection adjustments• Cash strategies
• Budgets are structured to highlight reserves (so they aren’t forgotten)• Budgets are structured to highlight changes to reserves
(and expense challenges)
Executive Cash Management © Mission Systems, Inc. 2015
21Planning Cash for Asset Replacement
Asset Replace in (YR)
Life Value Annual $
2016 2017 2065
A 2016 5 $10,000 $2,000 $10,000 0B 2015 20 $20,000 $1,000 0 0 $20,000C 2021 6 $30,000 $5,000 0 0D 2025 10 $40,000 $4,000 0 0 $40,000E 2026 7 $50,000 $7,143 0 0
Total $19,143 $10,000 0 $60,000
Executive Cash Management © Mission Systems, Inc. 2015
22Resulting Cash Projection
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
Balance with $19,143/a Contribution to Reserve
Executive Cash Management © Mission Systems, Inc. 2015
23Resulting Cash Projection
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
($150,000)
($100,000)
($50,000)
$0
$50,000
$100,000
Balance with $15,000/a Contribution to Reserve
Executive Cash Management © Mission Systems, Inc. 2015
24Resulting Cash Projection
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
($40,000)
($20,000)
$0
$20,000
$40,000
$60,000
$80,000
$100,000
Balance with $15,000/a Contribution to Reserve
Executive Cash Management © Mission Systems, Inc. 2015
25Resulting Cash Projection
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Balance with $9,000/a Contribution to Reserve
Series1
Executive Cash Management © Mission Systems, Inc. 2015
26Planning Cash for Asset Replacement
• After the analysis and adjustments, a plan results.
• The plan determines the annual cash contribution to be made.
• The plan determines the budget year ending cash balance.
Executive Cash Management © Mission Systems, Inc. 2015
27Budget Structure – How to Track the ReservesRevenue Expense- $X - $E- _____________ $Y - $FOperational $Z - Asset
Replace$75,000
$A Operational- _____________ $B - $MNon-Operational
$C - _____________ $N
Non-Operational
$O
Total Revenue $1,000,000 Total Expense $900,000Net In/Out $100,000
Reserve Jan 1 Budget Change
Dec 31 Objective Over/Under
Working Cash
$125,000 $0 $125,000 $125,000 $0
Asset Replace
$90,000 $60,000 $150,000 $150,000 $0
Emergency $50,000 $40,000 $90,000 $50,000 $40,000
Executive Cash Management © Mission Systems, Inc. 2015
28Budget Structure – How to Show the Reserves
• Rules for the structure:• Annual contribution to asset replacement is a
planned objective and results from the budget• If there is zero asset replacement expense in a year,
the annual contribution still must be per the planBudget surplus >= Annual contribution LESS asset replacement expense
Executive Cash Management © Mission Systems, Inc. 2015
29The Challenge
• Create realistic cash reserve objectives
• Dynamically manage them to meet overall financial needs
• Protect the organization from bankruptcy
Executive Cash Management © Mission Systems, Inc. 2015
30What Should We Expect?• The Board or Council will formally establish rational cash
objectives• The objectives will be a prominent part of the budget display• The Treasurer will provide the budget impact on the reserves
and compare the result to the objectives.• The Board or Council will decide what to do when there’s a
surplus and when there’s a shortfall• “What to do” is both a reserve allocation question and a
budget question.• Ongoing maintenance of “short-lived” assets lists and
adjustment of cash requirements.
Executive Cash Management © Mission Systems, Inc. 2015
31Executive Cash Management
Consultant: Fred C. Marshall, Ph.D.(360) 642-2073
fred@mission-systems-inc.com
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