MONEY MANAGEMENT STUDY JOINT FINANCIAL MANAGEMENT IMPROVEMENT PROGRAM JANUARY 1976

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FOREWORD

The Joint Financial Management Improve­ment Program was authorized by the Budget and Accounting Procedures Act of 1950. It is a joint and cooperative undertaking of the Office of Management and Budget, the General Accounting Office, the Treasury Department, and the Civil Service Commission, working in cooperation with each other and with each of the operating agencies. The overall objective of JFMIP is to improve and coordinate financial management policies and practices throughout the Government so that they will contribute significantly to the effective and efficient planning and operation of government programs.

This booklet is based on a study by an interagency Money Management Task Force organized by the Joint Financial Management Improvement Program. The study has demon­strated that substantial savings can be achieved by careful attention to cash manage­ment. Where appropriate cash management policies and practices do not exist, they should be established. It is hoped that the guidelines in this publication will be useful in this effort.

Users of this publication are invited to comment or provide suggestions on its usefulness. Comments and requests for copies should be sent to the Joint Financial Management Improvement Program, 666 11th Street, N.W., Suite 705, Washington, D.C. 20001.

May 1976

~e.~ Executive Director

Joint Financial Management Improvement Progr>am

JUL 2 6 1978

J_AW LIBRARY

MONEY MANAGEMENT IN THE FEDERAL GOVERNMENT

CONTENTS Page

INTRODUCTION 1

DISBURSEMENTS 9

COLLECTIONS 2 2

FORECASTING 31

GUIDELINES 39

CON CL US IONS 4 3

APPENDIX A - MONEY MANAGEMENT TASK GROUP 45

APPENDIX B - THE POSTAL SERVICE EXPERIENCE WITH CASH MANAGEMENT 47

MONEY MANAGEMENT STUDY

INTRODUCTION

Cash management in the Federal Govern­ment has not received a large degree of attention from decisionmakers outside the U.S. Treasury Department. Few executive branch agencies have established specific policies with regard to cash management. While agency practice is directed by certain statutory provisions and Treasury Department regulations prescribing deposit procedures, methods for advance financing and other matters, cash implications do not always receive adequate consideration. Treasury's cash flow is, therefore, affected by the degree of discretion exercised by agency managers in their program decisions. This situation is attributable in large part to a lack of incentive for agencies to manage the Government's cash resources efficiently. In the private sector rising interest rates and the profit incentive have spurred vigorous activity in the field of money management to maximize utilization of cash resources. Since Treasury administers the public debt and budgets for the related interest costs, Federal agencies do not benefit directly from interest reductions. Therefore, there is no direct reward for good cash management practices and, conversely, decisions made without regard to the time value of money do not result in observable higher agency costs. The higher cost is buried in the Treasury's budget under interest on the public debt.

Because of the significance of the subject and the substantial amounts of money involved, the Joint Financial Manage­ment Improvement Program carried out a Money

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Management Pilot Study, beginning late in 19 74 .

This study has been performed by an interagency study team designated the Money Management Task Group. The group included people with a variety of cash management and other financia l management skills from the General Services Administration, the Treasury Department, the Office of Management and Budget, General Accounting Office, U.S. Postal Service, Navy Department, Department of Agriculture, Department of Health, Educa­tion and Welfare, and the National Aeronau­tics and Space Administration. Jerry G. Bridges, Office of Financial Management, GSA, served as Project Director . (See Appendix A for list of team members.)

The objectives of the study were:

- To determine and develop an under­standing of money management policies, procedures and practices at the operating agency level .

- To evaluate the effectiveness of these policies, procedures and practices with regard to effective utilization of funds and to accomplishment of organizational and program objectives.

- To analyze and present alternative courses of action, including the appropriateness of Government- wide guidelines, for maximizing the utiliza­tion of Government funds.

- To recommend a course of action that would improve both money management and mission accomplishment.

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Field of Cash Management

In any productive organization, cash must be viewed as a productive resource subject to maximum utilization, just as manpower and material resources, in the course of achieving the desired organizational objectives. Management of cash includes the areas of accounts receivable and accounts payable, as well as the custodial responsi­bilities and control systems. While the environment and motivation for managing cash may differ between the private and public sectors, the techniques are not completely dissimilar.

Probably the most dynamic aspect of corporate finance over the past ten years has been in the management of cash. This development has been motivated by higher costs of money, on average, since the mid-1960s than during the first two decades of the post-war period, and has been aided greatly by improved technology in the area of data collection and analysis. Fur­ther, many banks have recognized the needs of corporate customers and have responded by providing an array of cash management services.

The concept of effective cash manage­ment in a corporation is quite simple. The objective is to insure that funds are avail­able to meet organizational requirements at a minimum cost, including the opportunity cost associated with uninvested funds. What is required is: an accurate cash flow fore­cast to minimize the cost of "insurance" borrowing; the timely mustering of receipts from point of receipt to a form and place where funds may be invested or spent; and a scheduling of disbursements to insure that

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suppliers are paid on a timely basis, but not prior to payment deadlines.

The implementation and operation of an effective cash management system varies in complexity with the size and scope of the organization and with the value of the funds flow. The larger the dollar flow the more expense can be justified in managing cash, because of the explicit or opportunity interest cost.

While the major monetary consideration that motivates the private sector toward effective cash management practices is the profit opportunity, the opportunity to mini­mize interest costs can similarly motivate the public sector to initiate effective cash management practices.

In the public sector, state and local governments have given more attention to cash management than has the Federal Govern­ment. State governments, including New York and Connecticut, have provided examples of sophisticated approaches to bank account management and investment programs.

In the Federal Government, some organi­zations such as the U.S. Postal Service have adopted business-type cash management practices, but there has not been general use of such practices in the traditional government organizations.

Interest costs to the Federal Government are incurred for three reasons: (1) borrow­ings to finance expenditures in excess of receipts (Federal budget deficits); (2) borrow­ings to maintain liquidity when receipts do not coincide with expenditure requirements; and (3) borrowings to insure liquidity

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in the face of uncertain receipt and expenditure patterns.

The major areas of interest are in narrowing the gaps between disbursements and receipts, and, to a lesser extent, reducing the uncertainty in forecasting net cash flow. As a practical matter, narrowing the disbursement-receipt gap involves expediting receipts, and controlling the timing of disbursements. Accurate fore­casting can contribute to the minimization of "insurance" borrowings to maintain needed cash balances and maximization of inputs to fiscal or economic decisions regarding Government spending.

During FY 1974, approximately $68 billion, or 25 percent of total Government receipts, were collected through Federal agencies other than the Treasury Department system of tax and loan accounts. The $68 billion of Federal agency receipts came from a wide range of types of transactions including duties and tariffs, sales of goods and services, and loan repayments. For each day that an average day's value of such receipts is continually delayed in process, the Treasury, and therefore U.S. taxpayers, would experience an interest cost in the order of $14 million per year.*

On the disbursements side, the program agencies of the Federal Government are

*Note: All computations in this report are based on a 7 1/2 percent interest rate and a 365-day year as a matter of convenience and consistency.

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expected to incur gross outlays of approxi­mately $400 billion, or over $1 billion per calendar day in FY 1976.

It should be recognized, therefore, that programs, policies and procedures of Federal agencies that affect the flow of funds are of considerable consequence in the effective management of U.S. Government funds.

Scope and Methodology

Due to the vastness of the Federal Government, the interagency study team limited its study primarily to within the Department of Agriculture . That Department, because of its diversity in operations, provided a good one- Department sample of many of the activ­ities that are also carried on in other executive agencies and departments. Among these are programs in the areas of human and natural resources, research, inspection, and making and guaranteeing loans. Also, the Department, with an annual cash flow approximating $10 billion, provided a good testing ground for studying both the collection and disbursement of cash. Some information from other agencies was also included in the study on a less formal basis.

Specifically, the study gave attention to the following:

(1) Determination of the pilot agency's stated policies, procedures and practices with regard to cash manage­ment, including forecasting, controls, collections and disbursements.

(2) Examination of implementation, applica­tion, and execution of the policies, procedures and practices.

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(3) Analysis of specific types of decisions to determine their cash management implications.

(4) Assessment of impact of central agency policies on operating agencies.

(5) Evaluation of the time cost of money as a factor impacting on the decisions.

(6) Assessment of the overall impact of the agency's cash management operations.

(7) Identification of special problems affecting cash management.

The work was divided among the team members to conform with what were considered the major segments of cash management, i.e., forecasting, collections and disbursements. The subgroups worked independently, and the entire team met periodically to discuss the progress made and to exchange ideas among the membership.

The techniques used to accomplish the work included reviewing documents and interviewing key officials at department and agency levels in Washington and in field offices. In projecting the cost impact of various practices addressed in this report, an interest rate of 7 1/2 percent was used. This rate was determined to reasonably approximate the average Treasury borrowing rate over the period September 1974-April 1975 of the study. Also, as a matter of convenience and for the sake of consistency, a 365-day year was used through­out.

Information on agencies other than the Department of Agriculture was obtained from

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interviews with key officials of those agencies, from documentation provided by such officials, and previously published information .

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DISBURSEMENTS

Disbursements represent the outflow of cash from the U.S. Treasury in the form of checks issued and cash payments made. In the budget process, outlays are commonly interpreted synonymously with disbursements. (Technically, not all disbursements are budget outlays and some budget outlays do not involve immediate disbursements, e.g., payroll deductions.) However, there is a distinction between outlays and disbursements which impacts significantly on the field of cash management. Outlays are normally pre­sented in net terms, i.e., gross payments less offsetting receipts for reimbursements, refunds and loan repayments received and credited in the appropriation accounts or fund accounts. Cash management is concerned with the gross outflow of cash and not just the net outflow after offsetting receipts.

The outflow of cash represents the largest area of cash management in terms of dollar flow. As indicated earlier, gross disbursements in FY 1976 are estimated at about $400 billion. This takes into account the net outlays in the budget plus reimburse­ments, refunds and loan payments received and credited in the appropriation or fund accounts. The average daily outflow of checks issued and cash payments is more than $1 billion per calendar day. Because of the uneven flow of receipts, much of the outflow repre­sents the disbursement of funds acquired through Treasury borrowings. Considering the time value of money, it would cost about $75 million to borrow that amount at an interest rate of 7 1/2 percent. Therefore, theoretically, if the Government were to make all payments on an average of 14 days earlier than due, the additional interest

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would amount to more than $1 billion per year at 7 1/2 percent. Although Treasury pays all interest costs associated with Government disbursements, the timing of such disbursements (except those required by law) is generally based solely on agency program decisions which may or may not adequately consider the effect on Treasury's cash flow.

Financial managers, in their quest to maximize the use of cash resources, are concerned that effective controls are avail­able for managing the disbursement process. Good cash management practices generally dic­tate that disbursements be made when due and only when due. The timing of disbursements represents an integral part of economic decisions that managers must make in carry­ing out their responsibilities. Arguments for making disbursements earlier than the due date include the generation of goodwill with suppliers, thereby bringing about increased services, and the granting of offsetting price considerations by the supplier. However, it is important that managers weigh carefully the relative economic advantages of incurring the in­creased interest costs vis-a-vis the rela­tive benefits accruing to the Government from early disbursement. In order for managers to have the flexibility to make the optimum decision, there must be an effective system of controls available to allow the programming of disbursements in accordance with that decision.

In a large organization, such as the major departments and agencies of the Federal Government, there is the potential for great variability in the quality and form of disbursement decisions. Two

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approaches are generally recognized for meeting such a problem. One is to centralize, to the extent practical, the management of an organization's payables, particularly those of large dollar amounts. Another approach is to set up administrative limitations on the amount of disbursements particular organizational units are authorized to make within specified time periods. The Department of Agriculture, through the establishment of the National Finance Center (NFC) in New Orleans, Louisiana, has implemented the former approach. This represents a step in the direction of improving the cash manage­ment practices within the Department by providing the management with the capability and opportunity to control and schedule the disbursement process. Decisions can be made and carried out on the basis of sound and uniformly applied economic considerations that are in the best interest of the Federal Government and the Department of Agriculture. Aside from the cash management gains, the NFC strengthens and improves the Department's system of accounting for financial trans­actions and reporting the results and status thereon.

The second approach, i.e., the use of administrative limitations on spending, has not been widely used in the major departments and agencies. While administrative limita­tions on obligation authority are commonplace in the Federal Government, spending or dis­bursement limitations as to amount (other than overall annual outlay ceilings) and timing have not generally been used. There­fore, without some form of centralized management and control of payables, the disbursement practices are-essentially the responsibility of the managers of organiza­tional subunits.

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Current Practices

The Department of Agriculture policy is to pay invoices promptly after delivery of goods or performance of service. This policy is based on the premise that prompt payment prevents excessive recordkeeping and accounting for outstanding accounts, and helps to maintain good public rela t ionships with vendors. Except for advance payments, the Department of Agriculture has not published any policy statements or procedures designed to alert program and financial management officials that interest is a cost which is related to all Government expendi ­tures. Thus, interest costs are not a consideration in procedures for establishing payment dates and paying vendor invoices. Bills are paid as they are received, subject to the administrative time lag required to execute appropriate paperwork.

Other agencies and departments of the Federal Government are following essentially the same policy as the Department of Agri ­culture of paying bills as t hey are received. Scheduling of payments to correspond with the due dates has not been practiced over the years because the thrust throughout the Government has been prompt payment . Depart ­ments and agencies usually take advantage of cash discounts, but in some cases discounts may be paid in advance of the discount date . In the following paragraphs, specific examples of disbursement practices are discussed along with the time value of money impact assooiated with those p r actices .

1. Vendor Payments

Vendors are often paid by the Forest Service either befor e bills a r e due, as

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indicated on the invoice, or faster than the normal practice in private industry when no due date is indicated. An examination of 50 payments made in the Portland Forest Service region showed that 76 percent of the payments were made on average of 11 days in advance of the payment dates normal in private industry (30 days after receipt of goods or services, or receipt of the invoice, whichever is later). The study team estimated that these fast payments, totaling $1.5 million, resulted in $3,500 increased interest costs to the Government, or an additional interest cost of approxi­mately $225,000 for each $100 million paid 11 days in advance of the due date.

Obviously, this limited examination may not be representative of the average payment cycle in the Department of Agriculture, but it does demonstrate that payments are often made before they are due. Furthermore, all administrative payments of the Forest Service and all other components of the Department of Agriculture are scheduled in the near future to be made by the National Finance Center in New Orleans. The highly mechanized computer system at the National Finance Center (FFC) is designed to expedite current payments. Thus, interest costs associated with early payments may well increase in the future as the administrative time required to execute appropriate paperwork decreases due to use of sophisticated EDP techniques. This, of course, could be avoided by policy decisions which would call for changed scheduling of payments.

An article in the June 1974 Federal Accountant entitled, "Cash Management in the Federal Government: Two Points of View," written by Michael Melburn and John W. Cooley,

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addressed the subject of invoice payments. Indicated in that article are the results of a survey of 111 disbursement transactions where the invoices reflected the day the payment was due. In 85 percent of these transactions, payments were made on the average of several days in advance of the established due date. While this survey included only one disbursing office in the Department of Defense, it does serve to further demonstrate that the policies · being carried out by disbursing officials do not emphasize payment on due dates.

Another example of early payment of vendor invoices was recently disclosed in the General Services Administration. Pay­ments were being made to vendors on the basis of shipping information rather than on the basis of delivery of goods . The Government practice is that payment terms are based on delivery of goods or receipt of invoices, whichever is later. Therefore, payments were being made before the normal due date and in some cases before title to the goods was assumed by the Government . The procedures have now been changed by GSA to provide that payment be made on the invoice due date. It is estimated that this change will save up to $5 million annually in money costs.

In addition to examples of early pay­ments, there are also incidences of late payments by agencies. Basically, the late payments tend to be in the area of small purchases, i . e., those purchases less than $10,000 and in the area of disputed claims. Evidence indicates that for the receipt of these small purchase goods at locations other than central warehousing stations, the unfamiliarity of people with the pro­cedure of forwarding the receiving reports

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to the central office causes payment delays. Furthermore, according to the GAO Policy and Procedures Manual for Guidance of Federal Agencies, not only are the receiving reports required at the central office prior to expenditure authorization, but also vouchers, vendors' invoices, purchase orders, and contracts. The result of this procedure is that time delays on payments occur if any one of these forms must be tracked down. Late payments can have an adverse effect upon suppliers, particularly small and medium size firms. The adverse public relations impact of delayed payments can be significant. Clearly, this area warrants further attention.

2. Loan Disbursement Practices

The Farmers Home Administration (FmHA) makes loans to farmers and others in rural areas for a wide variety of purposes. The volume of such loans was about $3.5 billion in FY 1974 and is growing rapidly. The past practice in disbursing payments for these loans was to withdraw the entire amount of a loan from the Treasury upon approval of the loan and deposit it in a local, supervised bank account which draws no interest. The borrower would begin paying interest on the entire amount of the loan immediately even though the construction work being financed by the loan might take a year or more.

The Money Management Task Group reviewed these practices, along with the JFMIP/USDA/ FmHA interagency team engaged in a coopera­tive project to develop an improved financial management system for FmHA and a GAO team studying interest costs in FmHA. The joint efforts led to a new Loan Disbursement System which will improve the handling of loans and

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result in substantial savings. Under the new system the money will be withdrawn from Treasury only as needed to keep pace with the construction work being financed and will be forwarded to the borrower without use of the supervised bank accounts. It has been estimated that application of the new Loan Disbursement System to the FY 1974 volume of $3.5 billion in loans would have produced annual interest savings to borrowers and the Government of about $20 million.~/ In addition, the new system would have made possible a reduction in initial loan outlays of about $373 million.

During the year beginning March 1, 1976, when the new system will be in effect, the volume of FrnHA loans is expected to be about $7 billion. Use of the new system during the next year should produce interest savings of about $40 million and a reduction in initial outlays of about $750 million.

3. Letter of Credit

Many Federal departments and agencies operate programs under which they advance funds to organizations outside the Federal Government to finance program disbursements .

. ~/In a September 10, 1975, report on "Per­sonnel Management Improvements Initiated or Needed to Help Farmers Horne Administra­tion Meet Its Expanded Mission," the General Accounting Office estimated that FrnHA borrowers paid interest of $14.8 million on idle funds in FY 1974 and the Federal Government incurred interest costs of $4.9 million on idle funds.

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These funds, amounting to an estimated $55 billion in FY 1976, are a considerable portion of the Federal budget.

Because the Government must pay interest on the funds it borrows to finance these programs, the timing of Federal payments to recipients has an important impact on the Department of Treasury's financing costs and the level of the public debt. It is Government policy to advance funds to grantees only as the funds are actually needed to meet the expenses incurred in carrying out the Federal programs.

The letter- of-credit financing method is one means of making cash available to recipients of grants and contracts to obtain Federal funds quickly while at the same time controlling the withdrawal of cash from the Treasury in order to minimize the impact on the level of the public debt .

Treasury Department Circular 1075 requires that if a program agency has a continuing relationship with a recipient organization for at least one year involving annual advances aggregating $250,000 or more, the agency shall use the letter- of­credit financing method. A letter of credit, which must be executed by an authorized certifying officer of the program agency, gives the grantee authority to draw funds directly from the Treasury through its commercial bank and the Federal Reserve Bank (acting as agency of the Treasury), subject to any monetary or other limits established by the program agency. The letter-of-credit method enables grantees to draw cash as needed. At the same time, it minimizes cash flow from the Treasury with substantial savings on the amount of interest

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the Federal Government must pay or money it borrows to finance grant programs.

However, since interest costs incurred on funds outstanding are borne by the Treas­ury rather than by the operating agencies, there is little incentive for grantmaking Federal agencies to minimize cash balances of grantees. Thus, many Federal administer­ing agencies have not developed the sophis­ticated techniques required to take full advantage of the interest savings possible through the letter-of-credit financing meth­ods. For example:

- HEW internal audits in 1968 and 1972 disclosed that agency manage­ment was not applying sufficient emphasis to effectively imple­ment procedures designed to moni­tor State agency use of letter of credit. Although periodic reports submitted to HEW by State agencies showed that some letter-of-credit holders continuously had excessive cash balances, HEW did not take action to reduce these balances. The average amounts of excessive balances identified by the inter­nal audits were in the tens of millions of dollars.

- The Department of Labor internal auditors found that letter-of­credit withdrawal practices by State Employment Security Agencies during calendar year 1973 resulted in average daily cash balances of $54.8 million in excess of needs. Improved letter-of-credit practices by the State Agencies would result

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in annual interest savings to the Federal Government of $3.5 million.

- The HEW Cash Flow Analysis Task Force study disclosed that HEW has the same problems today as disclosed by the internal auditors in the past; that is, very limited monitor­ing of the flow of cash to recip­ient organizations. As a result, the flow of cash to recipients was not adequately controlled. Thus, excessive cash balances were in the hands of recipients.

- An April 29, 1975, GAO audit report entitled "Opportunities for Savings in Interest Cost Through Improved Letter of Credit Methods in Federal Grant Programs," disclosed that, notwithstanding letter-of-credit improvements initiated by the Treasury and some agencies, certain problems continue to exist. Inade­quate Federal agency requirements for grantees to report cash balances contributed to the withdrawal of Federal funds before they were need­ed for disbursement by 16 of the 17 recipients included in GAO's review. Analysis of the 16 recipients' Fed­eral fund balances showed that Gov­ernment interest costs were unneces­sarily increased by about $284,000 for a six-month period in FY 1973.

In this same vein, Treasury has become increasingly concerned that regulations rela­tive to advance financing are not being fully observed. Consequently, Treasury has intro­duced on a test basis the Letter of Credit -

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~reasury RDO System. Under this new tech­nique, letters of credit are maintained at, and drawdowns are functioned through, the Treasury Regional Disbursing Offices (RDO), rather than the Federal Reserve Banks and Branches . In addition, the payment request is formatted in such a fashion that the grantees must provide a miniature status of Federal funds report with each request for d r awdown .

The RDO system is designed to give Fed­eral agencies a better tool for controlling advances and monitoring the cash management practices of Federal grantees without Treas­ur y either assuming or relieving the Federal agencies of primary responsibility for con­trol and audit. In addition, it provides Treasury with a better media for overseeing that agencies are fulfilling their cash management responsibilities.

Conclusions

The task group concluded that the time value of money is consistently absent from consideration in agency disbursement decisions. This is primarily explained by two factors, the historical emphasis on prompt payment to foster good vendor relations and the emphasis on mission accomplishment. Program managers often appear to believe that money is a free resource and that Government fi ­nancing costs are a Treasury responsibility and burden.

The Task Force found evidence of these two early payment factors in the Department of Agriculture's policy for prompt payment. The policy was basically to prevent excessive recordkeeping and to foster good public relations, without cash management consider-

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ations. Thus, the Treasury borrowing rate is slighted from consideration and emphasis is placed on discounts, completing paperwork and promoting goodwill. Review of the other agencies' practices tended to confirm this situation.

As illustrated by the changes made in procedures and in loan disbursement practices of FmHA, there are many situations ip which simple adjustment of disbursement procedures will result in improved cash management and governmental cost savings.

Also, in the area of late payments, it appears that many cash problems might be eliminated by the joint efforts of GAO and the executive agencies in reviewing current legislative and regulatory requirements.

Finally, one of the more promising cash management techniques for improving agency to organization disbursement procedures is the letter-of-credit financing method. Through this procedure, funds are available when needed. The letter-of-credit method will only succeed, however, if drawdowns occur on the basis of need.

The task group concluded that Federal agencies should issue and implement policy statements to stress money costs as a con­sideration of all program decisions. Pro­cedures evolving therefrom would be designed to assure that the time value of money is adequately considered in decisions leading to the disbursement of Federal funds. Re­sultant decisions would then be the product of careful weighing of all pertinent program and financial factors to gain maximum pro­gram benefits in terms of resource costs to the Federal Government.

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COLLECTIONS

During FY 1974, approximately $68 billion, or 25 percent of total Government receipts of $265 billion, were directed through Gov­ernment officers or agents prior to being deposited to the general fund of the U.S. Treasury. The $68 billion of Federal agency receipts emanate from a wide range of types of transactions, including duties and tariffs, sales of goods and services, and loan repay­ments . For each day that an average day's value of such receipts is continually delayed in process, the Treasury, and therefore U.S. taxpayers, would experience an interest cost on the order of $14 million.

Government deposits are accepted at 36 Federal Reserve Banks and branches, each of which maintains a U.S. Treasury account. Receipts from Government offices flow into these accounts daily, either directly or through commercial bank depositories. The systems under which agencies receive collec­tions, credit accounts, process checks, and make deposits are largely determined by the individual agencies. Because of the wide variance in agency programs and responsibili­ties, a single collection system is not practical.

The most effective collection system from a standpoint of fund availability and borrowing costs would be one that minimizes the lapse between the time money is due to be received by the Government and the time money is available for disbursement. The optimum would be immediate wire payment by the payee to the Government when due. How­ever, currently this is not practical due to the large numbers and types of payments and the necessary documentation. Systems incor-

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porating advance billing and payments, or payments on or before receipt of goods and services, and processing the payment and the accounting documentation as separate entities all expedite the availability of funds to the Government. The aggregate benefit of sound collection procedures is the increase of the productivity of cash as an asset. Systems that bill and subsequently process documents and remittances together prior to deposit retard the availability of funds to the Government.

Quite distinct from the private sector, many Federal agencies are able to treat money as a free resource and, in such cases, the interest cost does not enter the decision process for establishing agency collection procedures and programs. At the operational level, individual deposits are frequently delayed contrary to sound cash management principles and existing regulation, both purposefully, as a matter of convenience, and accidentally. In most cases, those responsible for delays are unaware both of the relevant regulations and of the economic consequences of their acts. Unlike private corporations, Government agencies typically do not regard the flow of money value and the flow of related documents as separable. Thus, in the development of systems and pro­cedures for processing the documents, the money flow is sublimated to the document flow. Because the time value of money is not con­sidered at the program and policy management levels, programs and procedures that system­atically delay the flow of money may be instituted.

The task force examined in detail the collection processes of the U.S. Forest Service, Portland and Atlanta Regions; the

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Farmers Home Administration (FmHA) , St. Louis Finance Center, and selected Maryland and Virginia county office operations; and the Department of Agriculture National Finance Center in New Orleans . Discussions were also held with the Bureau of Customs and the Department of Housing and Urban Development.

Current Practices

The following is a discussion of prac­tices observed at the operating level in the pilot agencies that are inconsistent with effective money management. The observations in the area of collections are categorized as preparation of bills, processing paid bills, and delinquencies .

1 . Preparation of Bills

In general, it is the practice of Fed­eral Government agencies to require payment at the time of delivery of goods or services sold . Strict adherence to such a policy would, of course, be the ultimate in effec­tive cash management where payments for goods or services are involved . In many cases, however, such an arrangement is not practicable. In these instances, payment arrangements must be made with the recipient of the goods or services .

A wide variance in billi •• g procedures was observed in the Forest Service in the sale of timbe r from National Forests. In some cases, the observed differences are obviously the result of differences in the nature of business . In other cases, however, the reasons for differing practices are less obvious .

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In the Atlanta Region, timber companies are required to pay for standing timber prior to cutting. This practice not only insures that the Government receives its due payment, but also it insures that the Government has maximum expectable use of the funds represented by the transaction.

In the Portland Region, and elsewhere, timber cutters bid competitively on the basis of price per unit of timber cut. Therefore, it is necessary to measure the timber cut (called "scaling") and to factor the volumes against bid prices for each cutter and for each bid before a reckoning of the amount due can be made. Delayed billing is obviously required.

In at least some cases the Forest Service has the option of either scaling cuttings itself or of purchasing scaling services from private contractors. While other cost tradeoffs are not known at this time, reliance on private scalers results in billing delays averaging 10 days, accord­ing to a USDA Audit Report dated March 1975. In the best case, the internal operations and processing of the Forest Service require approximately 30 days from cutting to dis­patch of bills.

It is apparent that neither the billing procedures nor the scaling decisions are based on cash flow consideration. For example, a combination of eliminating the 10-day delay from private scaling and a 5-day shortening of the billing pipeline would result in gross interest savings in the order of $0.5 million per year.

As indicated above, these potential gross savings are not weighed against what

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may be substantial cost increases from required system changes. The gross values are reported only to emphasize the importance of including cash flow considerations in money handling procedures.

2. Processing Paid Bills

The task group had the opportunity to observe both centralized and decentralized processing of payments . The Forest Service receives the bulk of its payments at the forest level, while the FmHA has centralized the accounting and receipt of loan payments at the St . Louis Finance Center .

It was the observation of the task group that in the decentralized operation "mail float" time tends to be minimized, but payments processing may not be a full ­time responsibility and it may be sublimated to other considerations . Despite law and regulation to the contrary, the task group observed cases of delay in processing receipts for unimportant reasons, and the amount of funds involved did not seem to matter. For example, deposits of daily receipts for the Portland Regional Office of the Forest Service were held overnight to await a con­venient messenger trip, without considera­tion of the amount held. Also, the Mt . Hood Forest withheld making deposits the last business day of the month in order to simplify bank account reconciliation at the Regional Office, again without consideration of the amount held.

In centralized receipt processing, the delays resulting from subordinating the operation to other processes is avoided, but two other sources of delay are encount­ered. First, "mail float" and "availability

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float" are encountered as many payments must travel longer distances both in route to the processor and in returning to the paying bank. Second, if there is a tendency for many payments to be received on the same day of the month, "holdover float" may be experi­enced.

After analyzing data from FmHA the task group concluded that the centralization of receipts processing had increased "mail float" and "availability float" by four days, re­sulting in an estimated annual increase in Government interest cost of approximately $1 million.

The Department of Agriculture is con­sidering centralization of Forest Service collections. One procedure under considera­tion is to pass the collections and paper­work from the Regional Offices to the New Orleans Finance Center. The delay in fund availability could be as much as 15 days. Like the FmHA, most of the delay would re­sult from additional mailing and check clearance time. The 15-day additional in­terest cost could be $1.4 million annually.

There are operating tradeoff s between centralization and decentralization of pay­ments processing, and the task group had in­sufficient information to evaluate the net benefits available. In evaluating these tradeoffs, however, the time value of the funds has not been considered in the deci­sions to centralize payments processing.

Much of the delay in receiving avail­able funds can be attributed to the Govern­ment-wide penchant for keeping the payment and the associated documents together untiJ

27

the documents are finally processed. Unnec­essary delays will persist until the two parts of a payment transaction can be separated at the first process.

3. Delinquencies

Delinquent accounts are not normally a problem in those areas of Government that sell goods or services because of the pay­upon- deli very policy or other arrangements, such as the requirement for payment bonds that is used by the Forest Service. On the other hand, Government direct loan programs should be expected to experience payment delinquencies in a greater proportion than private sector counterparts, because the Government is typically the lender of last resort.

The decision to monitor and pursue deli­quent accounts has cash management, as well as credit management, implications. Unpaid amounts represent funds that could be loaned elsewhere or could reduce requirements to borrow. A 1974 delinquency rate for FrnHA was in excess of $20 million on a daily average, resulting in interest costs to the Government of over $1.5 million on an annual basis. While there are many factors that enter in to the establishment of delinquency processing, the cost of funds does not appear to have been influential historically.

This can be further illustrated by an example outside of the pilot agency (Depart­ment of Agriculture). GSA estimates that actual collection times for 18 percent of its stockpile sales to outside contractors are in the order of 90 days after the sale. These 90 days represent 30 days for bill preparation and 60 days for collection.

28

The sales agreements stipulate payment terms of 30 days after billing. Of the six months billings during the period September 1974-February 1975, approximately $130 million have been in the billing-collecting process for 90 days. If 30 of the 90 days could be eliminated, the annual interest savings would approximate $0.8 million.

Conclusions

From observations at the operating, supervisory, managerial and policy levels of the pilot agencies, and from discussions with personnel at various levels of other Federal agencies, the task group concluded that the time value of money is consistently absent as a consideration in establishing policy and procedures related to agency collections.

A wide variance in billing procedures was observed in the Forest Service in the area of timber sales.

In the area of processing paid bills, the findings showed a contrast between centralized and decentralized collection systems. Decentralization seems to mini-mize the time element, but in such a situ­ation the process of payments may be sub­limated by other administrative considerations. Consequently, the decentralization approach typically requires a tradeoff between earlier fund availability and meeting other agency objectives.

In centralized receipt processing, various types of delays exist but the "mail float" and the "availability float" delays are accentuated. Where centralized systems are used, more attention should be given

29

to scheduling payments, even if this involves computer system reprogramming. The favored procedure of the Government for keeping the money received and the associated accounting documents together also delays fund avail­ability. Hence, not only should the payment process be evaluated to ascertain areas for improvement, but also the processing of documents, so that the recording of collection transactions may also be improved.

Finally, concerning delinquencies, it was found that here both cash and credit management implications exist. From the GSA example, it was shown that if actual collection times for 18 percent of the stockpile sales were cut from 90 days to 60 days, $0.8 million would be saved in annual interest . From this, and the pre­ceding examples, areas for collection improve­ments in cash management are available. It is also evident that even though avenues are available for improvement in cash management practices, little consideration has been given to the money cost aspects of alternative collection arrangements. Further, it is apparent that this lack of consideration for the value of funds flow is undoubtedly costing the Federal Govern­ment many millions of dollars annually.

Yet, it should not be construed that the task group has concluded that Federal agency mismanagement has occurred. Quite the contrary, Federal agency managers have not been motivated or encouraged to manage money, and have, therefore, devoted their resources to other programs and practices.

30

FORECASTING

A forecast is a statement which indi­cates the most likely outcome of events to occur in one or more time periods in the future. Due to its futuristic nature, a forecast will contain varying degrees of uncertainty but that uncertainty should be minimized to the extent possible to achieve a better assessment of most probable results. For the most part, discussion will be limited to financial forecasts and in particular to cash flow forecasts and net outlay fore­casts. Since outlays are the net result of disbursements offset by receipts, the develop­ment of cash flow or net outlay forecasts may necessitate development of separate fore­casts for disbursements and collections.

In the determination of the most likely outcome, the forecast must take into con­sideration the most likely conditions and actions which affect that outcome. Thus, a forecast is an assessment of the result which best approximates actual accomplish­ment of financial aspects of agency programs. As such, an outlay forecast is an evaluation of the most probable outlay aspects of actual budget execution.

Financial forecasting in the Federal Government normally begins with the budget process. The totals of receipts and outlays set forth in the President's Budget are used to arrive at the Treasury borrowing require­ments for the period. While such estimates are helpful for measuring the overall finan­cial impacts of the Federal government's fiscal policy for the period, they ignore

31

the significant seasonality of both receipts and outlays, which occur within the fiscal period, and which are crucial factors in the Treasury's ongoing cash and debt management activities.

The Treasury Department has maintained informal contacts with other Federal agencies in its efforts to monitor cash flows and plan its required debt operations. In 1973, due to Presidential concern for controlling spending, and the existence of an extremely restrictive legal limit on the amount of borrowing that the Treasury could do to finance Federal operations, the Office of Management and Budget instituted a formal reporting system requiring all executive departments and establishments to submit monthly outlay plans. The Treasury and OMB's experience with these initial agency forecasts of outlays was quite disappointing. However, subsequent follow- up with the agencies to improve their ~stimates has resulted in some improvement . The current OMB Bulletin (#76 - 1 dated July 21, 1975), provides the following policy guidelines :

"The estimates reported should present the best current judgment, as to the amount to be spent by month in the period(s), covered by the report and should : (a) be consistent with the President's most recent annual budget, as amended, and subsequent actions of the Congress, including both completed actions and those now expected, and (b) consider recent trends and expected events on a realistic basis.

A brief statement will be included with each outlay report to e xplain the assumptions used in developing the outlay plan together with unusual or special

32

circumstances affecting the plan. The state­ments will enumerate expected Congressional actions, provide the estimated participation rates in benefit programs, show the dates of major asset sales, and discuss any other event that causes major fluctuation in the usual outlay pattern ... "

While more recent agency reports have been helpful in the cash and debt manage-ment area, their usefulness has been seriously hampered by the sporadic, and often-times tardy, submissions by the agencies, and the time required within OMB to assure the accuracy and consistency of the reports. Furthermore, the current bulletin does not call for voluntary submission of updated forecasts by the agencies, in those cases where there has been significant divergence from previously submitted estimates.

Since agency level procedures for making disbursements and collections are constrained significantly by statute and regulation, and since most agencies have no financial incentive to use good cash man­agement practices, many agencies of the Federal Government have a tendency to dis­regard the cash flow implications of decisions concerning the financial aspects of their program. Nevertheless, consider­ation of cash flow is generally accepted as an important aspect of prudent management, and, as such, should be included within the scope of the agency's management objectives.

In addition to exercising disbursement and collection practices tailored to mini­mize the time cost of money, each agency can play another significant role in the achievement of efficient government-wide cash management procedures. This role can

33

be accomplished by providing accurate cash flow forecasts to the Treasury Department, which has the overall cash and debt manage­ment responsibility, and to the Office of Management and Budget.

Due to the nature of the congressional appropriation process, many agencies have managed the financial aspects of their pro­grams by obligation control with little or no regard to the resulting outlays which follow. In recent years, however, there has been growing concern for the control and monitoring of outlays because, in any fiscal year, outlays impact more directly on fiscal policy than do obligations.

National economic policy questions are affected by budget outlays because of the sheer size of those outlays in relationship to the gross national product. The Executive Branch has repeatedly expressed its concern over budget outlays, particularly because of the necessity to concentrate fiscal policy adjustments increasingly on a small and diminishing portion of total outlays, that is, on those outlays which have been readily "controllable." The President's Budget for FY 1977 categorizes FY 1975 out• lays totalling $237.5 billion as "relatively uncontrollable outlays." This represents about 73% of the actual FY 1975 net outlays of $324.6 billion.

Congressional concern over economic policy determinations resulted in the enactment of the Congressional Budget and Impoundment Control Act of 1974. The new budget procedures intensify the need for accurate, timely, periodic outlay estimates and forecasts. The new Act also requires that the new Budget Committees conduct

34

on-going studies on off-budget agencies and studies on the effect on budget outlays of relevant existing and proposed legislation. For budget requests and subsequent budget execution, it can be expected that there will be new requirements for agency outlay estimates.

As agencies compete for and are held accountable for outlays as well as budget authority, those agencies that rely on finan­cial management systems based primarily on obligational control may find their ability to acquire and use funds for program objec­tives severely limited. The question with respect to agency outlay forecasting systems is not whether such capability is needed, but how best to provide outlay forecasting capability within the agency. In addition, cash flow forecasts may serve as another measure for monitoring the accomplishment of agency program objectives.

It is this growing awareness of the importance of outlay management, and the attendant imposition of outlay control, that has served to determine a need for outlay forecasting as part of the budget formulation and budget execution processes. Cash flow forecast should be considered an integral part of agency level financial management as well as part of the planning processes for administration of the public debt and determination of national economic policies.

Current Practices

It is recognized that development of a forecasting system is an evolutionary pro­cess which requires the evaluation of fore­casting experience over a period of time.

35

For most of the agencies examined during this study, the forecasting practices appear to be in the early stages of this evolution. Net outlay forecasts are generally prepared on a subjective and arbitrary basis as a secondary consideration of the budget formu­lation process. Guidance on development of outlay forecasts is meager and documentation of existing forecasting systems or techniques is practically nonexistent . The forecasts frequently do not include sufficient docu­mentation of assumptions and, as a result, there is a general inability to relate an original forecast to subsequently updated or modified forecasts . There is generally an inability to respond objectively to changing conditions that impact on outlay fluctuations and to assess that impact quantitatively in a forecast . In many cases there was little or no involvement of field or operational officials in the forecasting process.

As a result of these practices, there have been significant deviations between forecasted and actual net outlays for some Federal agencies.

Financial forecasts should be used as inputs to the development of budget estimates; however, the more significant role of finan­cial forecasts occurs during the budget execution phase . At that time financial forecasts can provide major support in efforts to control outlays .

Nearly all of the agency managers inter­viewed during this study expressed a desire for improvement of the forecasting capa­bilities available to them. In recognition of this need, several agencies have initiated improvement efforts. The major concern was

36

that forecasting was considered by most to be an unfamiliar and loosely defined aspect of financial management that suffered from the lack of general policy and guidance.

Conclusions

Due to the lack of uniformity and direc­tion in the preparation of outlay forecasts, it was concluded that a need exists for agencies to review their existing forecasting practices in terms of the proposed guide­lines included in this report and modify those practices when necessary to accommodate the guidelines. Improvements in forecasting accuracy may require considerabl·e technical development over a period of time; however, adoption of the guidelines should provide a sound framework for accomplishing forecast improvement in a logical and well-defined manner.

The difficulties associated with manage­ment of the public debt and formulation and implementation of sound economic policy, combined with the requirements of the Con­gressional Budget and Impoundment Control Act of 1974, indicate a need for better integration of obligation and outlay control and more effective outlay forecasting. With Federal spending running at approximately 22 percent of the Gross National Product, arbitrariness in outlay forecasting has a high potential for serious impact on deci­sions related to determining national eco­nomic priorities. Minimization of the arbitrary character of outlay forecasting will serve to provide a better planning base for achieving sound economic policy.

Improved forecasting will also be of benefit to program managers by providing

37

foresight on resource utilization and program accomplishment in terms of actual dollars spent.

38

GUIDELINES

The pilot study has demonstrated clear­ly the potential for improved management and substantial savings through more attention to cash management by operating agencies of the Federal Government. It also demonstrates clearly the general lack of policies and procedures in this area.

The following general guidelines were developed during the study, It is hoped that they will be useful to agencies in developing their own policies and procedures and improving their cash management practices.

Guidelines for Disbursements

1. Each agency should have a carefully developed disbursement plan as a part of its forecast of outlays, which should be consistent with the agency's objectives, strategies, program plans and budget.

2. A payment schedule and control system should be established.

3. Procedures should be established for evaluating economic factors, including the time value of money, in establish­ing payment schedules. Unless there are significant programmatic or policy factors, payments should generally be made at the time they are due.

4. Except for very large purchases where special analyses might be warranted, it is usually desirable to take cash discounts.

3.9 ..

5. Procedures should be reviewed to assure that payments to small vendors and for occasional purchases are not delayed beyond the due dates.

6. Fuller use should be made of letters of credit and other established procedures for managing the timing of payments for government programs.

7. Procedures should be established for regular comparison of actual with planned disbursements.

8. The causes and impact of significant variances from disbursement plans should be evaluated and plans adjusted when necessary.

Guidelines for Collections

1. Agencies with significant amounts of receipts should have a collections plan which is a part of overall forecasts and consistent with the agency's objec­tives, strategies, program plans and budget.

2. Collection schedules and control systems for billing and cash processing should be established.

3. Economic factors, including the time value of money, should be considered in development of billing cycles and collection procedures. The importance of prompt collection and deposit of cash should be recognized.

4. Procedures should be established for regular comparison of actual with planned collections.

40

5. The causes and impact of significant variances from planned collections should be evaluated and plans adjusted when necessary,

Guidelines for Forecasting

1. Financial forecasts should be an integral part of the budget process.

2. The forecasting system should be designed to incorporate information which is consistent with the agency's objectives, strategies and program plans.

3. All assumptions used in developing the forecasts should be selected objectively on the basis of available information and the assumptions should be documented.

4. Forecasts should incorporate the best and most recent information available within the limits of practicality.

5. The forecasting system and the forecasts should be developed objectively by qualified personnel.

6. Forecasts should provide management with a most likely outcome, supplemented when practicable with information on error potential or ranges of estimates.

7. The forecasting system should have a capability for evaluating the sensitiv­ity of the projected outcome to vari­ations in the assumptions.

8. Forecasts should be subjected to regular and timely reviews in the light of actual experience and revised assumptions.

41

9. Appropriate officials of the agency, the Treasury Department and the Office of Management and Budget should be notified on a timely basis of significant vari­ations from forecasts and planned changes.

42

CONCLUSIONS

The study has confirmed the previous assumptions concerning the importance of cash management in the Federal Government and the general lack of attention by oper­ating agencies to specific plans and pro­cedures with respect to cash management. This is not considered to be due to mis­management but to lack of motivation for agencies to manage cash efficiently. The study also has demonstrated that substantial savings can be achieved by careful attention to cash management.

In an effort to deal with the problem of agency motivation, there have been sug­gestions for establishment of procedures for charging interest to individual agencies for funds used or crediting them for funds not used. Another approach, at the other end of a spectrum of possible changes, would be to centralize all money handling functions within the Department of the Treasury. Any drastic changes such as these could involve substantial additional recordkeeping or fundamental impacts on agencies' programmatic and management responsibilities. Legislative changes would probably be needed. Very careful study would be required before such changes were made. Neither approach is considered prac­ticable at this time.

There are, however, several actions that can and will be undertaken. Information on cash management will be widely dissemi­nated. Publication of this booklet is a first step. Workshops and seminars are also planned.

43

Work is underway on development of an official government policy statement. Agencies will have an opportunity to comment.

Consideration is being given to initi­ation of a special study of incentives which would encourage agencies to adopt better cash management.

There also is a great deal that can be done by individual agencies. It is hoped that all agencies will consider the cash management implications of government deci­sions along with policy, programmatic and operational considerations. Where appropri­ate cash management policies and procedures do not exist, they should be established. It is hoped that the guidelines in this booklet will be useful in this effort.

The significance of cash management to an operating agency may be seen in the example of the U.S. Postal Service (Appen­dix B) .

44

MONEY MANAGEMENT TASK GROUP

Jerry G. Bridges, Project Director Off ice of Financial Management Office ,of Federal Management Policy General Services Administration

Betty I. Bradshaw Resources Systems Branch Budget Review Division Office of Management and Budget

Bruce A. Budlong Special Financing Staff Bureau of Government Financial Operations Department of The Treasury

William A. Fuchs Working Capital Unit Office of Management and Finance Department of Agriculture

* John E. Green Resource Management Department Office of Space Sciences National Aeronautics and Space Admini­

stration

James E. Gwinn Manpower and Welfare Division General Accounting Off ice

Lewis S. Lauria, Jr. State and Local Systems Staff Deputy Assistant Secretary, Finance Office of the Assistant Secretary,

Comptroller Department of Health, Education, and

Welfare

APPENDIX A

45

** James A. Lutz

*

Financial Analysis Division Office of the Comptroller Department of the Navy

Russell D. Morris Financial Planning Division Finance Department U.S. Postal Service

Returned to the Jet Propulsion Laboratory, Pasadena, California, after one year with NASA under the Executive Exchange Program.

** Resigned from the Government to enter private business.

APPENDIX A

46

U.S. POSTAL SERVICES EXPERIENCE WITH CASH MANAGEMENT

Prior to Postal Reorganization, Postal receipts immediately became U.S. Treasury funds and were not available to the Post Office Department for expenditure or invest­ment. Under this arrangement, Postmasters and other Postal managers were charged with accountability for the funds, but there was no organizational motivation for expeditious handling. While over the years a number of separate systems were utilized for processing Postal receipts, all of the changes that took place prior to 1972 were motivated by secur­ity, accounting, or accountability consider­ations rather than concern for cash manage­ment. With Postal reform came the respon­sibility to manage Postal receipts as income and the authority to invest excess funds in interest bearing securities. Since Postal reform, the Postal Service has moved in the direction of changing emphasis from accounta­bility to cash management.

As an indication of the importance of the cash management-investment function to the Postal Service, interest income during the first four fiscal years since Postal Reorgani­zation totaled $423 million. The total staff in the Treasurer's office during this period has been ten people, including secretarial and clerical support.

While the investment of appropriated funds has provided the greatest share of invest-ment income to the Postal Service, the major emphasis of cash management has been on the funds flowing through post offices. This flow has grown during the period, fiscal year 1972 to fiscal year 1975, from approxi­mately $54 million to approximately $60 million

APPENDIX B

47

on a daily average basis.

The goals of the Postal Service cash manage­ment effort have been to attain and maintain management control over Postal Service funds. As a result of this control, a significant reduction in net interest cost was expected. To date, the Postal Service cash management effort has focused on three aspects, cash and cash equivalents held in post offices, banking, including both the flow of funds and balances held in banks, and the schedul­ing of disbursements.

The following summarizes the impact of the program in the three areas mentioned. First, sampling indicated that cash and cash equiv­alents --in the form of bus tokens, bridge toll tokens, etc.--exceeded approved post office cash reserves by about one-third, and that approved reserves were substantially above actual cash requirements. Further, no institutional arrangements were available to monitor and control post office cash holdings.

Additional studies of actual post office cash needs resulted in the development and acceptance of flexible guidelines that would minimize cash balances in post offices but allow for special situations. Further, the responsibility for controlling these balances was specified within the post office with periodic review of conformance by an internal audit staff.

The banking system that the U.S. Postal Ser­vice inherited from the Post Office Depart­ment in July 1971 included a separate bank account for each of approximately 32,000 post offices. Each day, Postmasters would deposit their receipts to their bank accounts,

APPENDIX B

48

either by Registered Mail or by hand delivery. Upon receiving a verified duplicate deposit slip from the bank (which frequently arrived one or two days later in the case of mailed deposits), the Postmaster would mail a check in the amount of the deposit to the nearest Federal Reserve Bank in order to transfer funds to the account of the Treasurer of the United States.

Records indicate that the time required for the transfer of available funds from post office receipt to usable balances for the Treasury ranged from four to nine days. Longer delays were frequent in cases where Postmasters failed to make deposits or failed to remit to the Federal Reserve Bank. Four, five, and six day periods were rather frequent in cases where duplicate deposit tickets were delayed in return or remittances to the Federal Reserve Banks were delayed in the mail. The important point, however, is that the Post Off ice Department had no motivation to be concerned about delays, and the Treasury Department has neither knowledge nor control of the flow.

By instituting the use of telecommunications for data capture and more modern banking methods for funds movement, as well as ex post facto accounting adjustments in lieu of waiting for verified deposit tickets, the Postal Service was able to reduce the fund flow time to an average of approximately 2.5 days. Also of major significance was the development of an ability to manage the level of balances held in banks so that the banks could be adequately compensated for services rendered, yet wasteful, dormant balances could be avoided. This latter is accomplished by a combination of a region­alized estimation technique utilized for

APPENDIX B

49

smaller accounts and periodic staff review of balances, activity and costs in large bank accounts.

Finally a review of disbursement activity revealed that many bills were being paid well before they were due, while others were being paid after their due date, some­times with missed discounts. As a result of a review of practices in this area, the first steps of a rescheduling effort were implemented in 1974. Further improvement in disbursement scheduling is to be under­taken as part of a major overhaul of dis­bursement processing that is now in progress.

For a number of reasons, but primarily because of changes in accounting methods and a failure to collect adequate "before" data, the results of the Postal Service's cash management efforts cannot be specified precisely. However, as an indication of the order of magnitude of the effect, it can be noted that period end cash balances (including cash in banks) during 1971 and 1972 were approximately $200 million greater than during fiscal year 1975. This was occurred despite an increase in daily average cash flow of approximately 10 per­cent during the same period.

APPENDIX B

50