Creativity Session For The New Cash Forecast

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Text of Creativity Session For The New Cash Forecast

  • 1. Creativity Session for the new cash forecast Brian Shelton

2. Agenda

  • Reaffirm business problems, a.k.a. information gaps
  • Concepts
  • Ideas
  • Refine/Discuss
  • Next steps

3. Preliminary Meeting Comments

  • Conceptual Traits
  • Simple
  • Not perfection get 80% accuracy and 80% of the elements
  • Wide tolerance
  • Easy extraction of historical data as it will be used 2 to 3 times per month
    • Update should be limited to 8-16 hours per quarter for update
  • User profile includes Joe DAnna, Steve Lynne, Roger Beaty, Brian Shelton so Intermediate level is the LCD.
  • Maintenance Free
  • No extra time to use.
  • Operational liquidity is not the problem.

4. Preliminary Meeting Comments

  • Specific outcomes
  • Optimize maturities
  • Minimize risk of selling early to meet capital investment needs
    • Look out more towards the 3-5 year horizon
  • Remove guesswork and speculation about cash available for larger capital needs
  • Requirement: A capital investment cash available quarterly
  • Rebalance our portfolio because we tend to have too much liquidity and working capital
    • Comment: structure of portfolio has not adjusted to meet our spending needs
  • Remove risk of mistiming our capital expenditures and losing principal.
    • Cashing out prior to maturity

5. Clarification of Comments

  • Would there be potential users on the Utilities side?

6. Concepts

  • Recommended Practice of GFOA
  • Matching
  • Target balance
  • Target capital structure
  • Cash Box
  • Pro Forma
  • Cash Budget
  • Financial Performance Measures

7. Recommended Practice of GFOA

  • Use of Cash Flow Forecasts in Operations (2005 and 2008) states: Cash flow forecasting is distinct from governmental accounting and budgeting
    • Ultimate goal is to mitigate the need for short-term borrowing or liquidation of securities before maturity
    • Should be done organization wide to see all spending patterns that may impact potential shortfalls and excess balances.

8. CONCEPTS - Matching

  • Matching purchase securities that mature when funds are required to meet obligations
    • Requires careful cash forecasting
    • Requirescareful identification of capital requirements, including the impact on the operating budget (GFOA Recommended Practice Budget and CEDCP 2008)

9. CONCEPTS Forecast Dynamics

    • Target Capital Structure mix of debt vs. cash/fund equity to finance capital outlay
  • Target Investable Balance identify the available cash balance target net of collateral or reserve requirements
  • IDEA: An alert trigger based on expected project amounts and durations.
    • e.g. we expect a $60 million project over a 24 month period, so some mechanism to tell us to limit maturities to 18 mos. or less, or periods shorter than the 24 mos.

10. Forecast Model Ideas

  • Cash Box
  • Pro Forma

11. Cash Box Concept

  • Benefits from Comments
      • Not perfection get 80% accuracy and 80% of the elements
      • Wide tolerance
      • Easy extraction of historical data as it will be used 2 to 3 times per month
        • Update should be limited to 8-16 hours per quarter for update
      • Maintenance Free
      • No extra time to use.
  • Limitations
  • Doesnt remove risks of mistiming capital expenditures and losing principal
  • Forecast is really valid only over a short term 12-month horizon

12. What is theCash Box?

  • Monthly/Quarterly Use Forecasts 13 weeks based on averaged historical data
  • 3 schedules
    • Receipts Schedule (all sources)
      • Includes AR Balance Pattern
    • Disbursements Schedule (all uses)
      • Includes AP based on % of dollars to clear
    • = Net Cash Flow; 13 week CASH BOX
      • Net flows, beginning & ending cash balances,target balance , deficit/surplus
      • Forecast on arolling 13 week basis .

13. The Cash Box can be done for each fund or major cash account Simple for our monthly use. 14. What is the Pro Forma Forecast?

  • Advantages
    • Takes a view on likely interest rates
    • Best for Longer term capital budgeting
    • Uses Excel spreadsheets
    • Allows development of the cash budget
    • If used, can help minimize risk of selling early to meet capital investment needs towards the 3-5 year horizon
    • Removes guesswork about cash available for larger capital needs

15. Pro Forma Forecast, advantages contd

  • Ancillary Benefit
    • Puts capital needs in clear context of other relationships with cash, capital structure, investments.

16. CONCEPTS Pro Forma Forecast Model

  • Cons
    • Complex
    • Takes expertise to update and may require more than 1 experts input
    • Doing this does not change the structure of our portfolio

17. CONCEPTS Pro Forma Forecast Model

  • 6 schedules if Countywide 3 if Governmental only
    • 3 for Proprietary Funds
      • Statement of Net Assets
      • Statement of Revenues, Expenses and Changes in Net Assets
      • Combining Statement of Cash Flows
    • 3 for the Governmental Funds
      • Balance sheet
      • Statement of Changes in Net Assets
      • Combining Statement of Cash Flows

18. Ancillary Discussion items

  • Financial ratios as performance measures
  • Upload of the current portfolio into Bloomberg tools
  • Development of a Cash Budget as part of the annually adopted budget
    • Increase interest income?
    • Retire or amortize debt early?
    • Take advantage of vendor discounts?

19. Financial Performance Measures

  • Asset Management Efficiency
    • Total Asset Turnover
    • Fixed Asset Turnover
    • Current Asset Turnover
  • Liquidity
    • Stress Test annually in the ST forecast (aka contingency funding plan)
    • Acid Test Ratio
    • Cash Flow to Total Debt

20. Financial Performance Measures

  • Fund Performance
    • Residual Income
    • WACC
      • cost of debt + cost of equity
  • Capital Project Evaluation
    • Payback period
    • Cash Flow Index
    • Lease vs. Buy

21. Financial Performance Measures

  • Banking relationship
    • Scorecard evaluation
    • CAMELS ratings
  • Investment Portfolio Risk
    • Beta , for example
      • 0.0 - .1 at 360 days or less

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