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