Transcript
Page 1: Creativity Session For The New Cash Forecast

Creativity Session for the new cash

forecastBrian Shelton

Page 2: Creativity Session For The New Cash Forecast

Agenda

• Reaffirm business problems, a.k.a. information gaps

• Concepts

• Ideas

• Refine/Discuss

• Next steps

Page 3: Creativity Session For The New Cash Forecast

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 D’Anna, 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.

Page 4: Creativity Session For The New Cash Forecast

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”

Page 5: Creativity Session For The New Cash Forecast

Clarification of Comments

• Would there be potential users on the Utilities side?

Page 6: Creativity Session For The New Cash Forecast

Concepts

• Recommended Practice of GFOA

• Matching

• Target balance

• Target capital structure

• Cash Box

• Pro Forma

• Cash Budget

• Financial Performance Measures

Page 7: Creativity Session For The New Cash Forecast

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.”

Page 8: Creativity Session For The New Cash Forecast

CONCEPTS - Matching

• Matching – purchase securities that mature when funds are required to meet obligations• Requires careful cash forecasting• Requires careful identification of

capital requirements, including the impact on the operating budget (GFOA Recommended Practice Budget and CEDCP 2008)

Page 9: Creativity Session For The New Cash Forecast

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.”

Page 10: Creativity Session For The New Cash Forecast

Forecast Model Ideas

• Cash Box

• Pro Forma

Page 11: Creativity Session For The New Cash Forecast

Cash Box Concept

• Benefits – from Comments1. Not perfection – get 80% accuracy and 80% of

the elements2. Wide tolerance3. Easy extraction of historical data as it will be

used 2 to 3 times per month1. Update should be limited to 8-16 hours per

quarter for update4. Maintenance Free5. No “extra” time to use.

• Limitations1. Doesn’t remove risks of mistiming capital

expenditures and losing principal

2. Forecast is really valid only over a short term 12-month horizon

Page 12: Creativity Session For The New Cash Forecast

What is the “Cash 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 a rolling 13 week basis.

Page 13: Creativity Session For The New Cash Forecast

The Cash Box – can be done for each fund or major cash account

$ Amounts in $1,000's Week 1 Week 2 Week 3Cash Receipts 1000 1000 950Cash Disbursements -870 -1350 -1000Net Cash Flow 130 -350 -50Beginning Cash Balance 100 230 -120Ending Cash Balance 230 -120 -170Target Balance (min) -100 -100 -100Financing Needed 0 220 270Investable Funds 130

Simple for our monthly use.

Page 14: Creativity Session For The New Cash Forecast

What is the Pro Forma Forecast?

• Advantages1. Takes a view on likely interest rates2. Best for Longer term capital budgeting3. Uses Excel spreadsheets4. Allows development of the cash budget

5. If used, can help minimize risk of selling early to meet capital investment needs towards the 3-5 year horizon

6. Removes guesswork about cash available for larger capital needs

Page 15: Creativity Session For The New Cash Forecast

Pro Forma Forecast, advantages cont’d

• Ancillary Benefit• Puts capital needs in clear context of other

relationships with cash, capital structure, investments.

Page 16: Creativity Session For The New Cash Forecast

CONCEPTS – Pro Forma Forecast Model

• Cons• Complex• Takes expertise to update and may

require more than 1 expert’s input• Doing this does not change the structure

of our portfolio

Page 17: Creativity Session For The New Cash Forecast

CONCEPTS – Pro Forma Forecast Model

• 6 schedules if Countywide – 3 if Governmental only• 3 for Proprietary Funds

1. Statement of Net Assets2. Statement of Revenues, Expenses and

Changes in Net Assets3. Combining Statement of Cash Flows

• 3 for the Governmental Funds1. Balance sheet2. Statement of Changes in Net Assets3. Combining Statement of Cash Flows

Page 18: Creativity Session For The New Cash Forecast

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?

Page 19: Creativity Session For The New Cash Forecast

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

Page 20: Creativity Session For The New Cash Forecast

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

Page 21: Creativity Session For The New Cash Forecast

Financial Performance Measures

• Banking relationship• Scorecard evaluation• CAMELS ratings

• Investment Portfolio Risk• Beta, for example

• 0.0 - .1 at 360 days or less • <0.1 at 1-3 yrs• < 0.2 at 5 yrs• <0.3 at 10 yrs

Page 22: Creativity Session For The New Cash Forecast

Financial Performance Measures

• Portfolio Performance• CME Barclays Capital US Aggregate Bond Index, in

trailing 1, 3, 5 and 10 year annualized index returns• http://www.cmegroup.com/trading/interest-rates/interest-rate-index/cme-lehman-brothers-us-aggregate-index_resources_a

bout.html

• exceptionally broad-based • more than 9,200 issues • market value of over $9.4 trillion securities (as of August 1, 2007)

• components include: • Debt instruments representing U.S. Treasury, government-related,

corporate, mortgage-backed securities • Asset-backed securities and commercial mortgage-backed securities

• More than 90% of U.S. money managers are benchmarked to the Barclays Capital Indices

• As of the end of 2006, an estimated $6.1 trillion in assets under management were benchmarked to Barclays Capital indices globally, of which $2.4 trillion were benchmarked to the U.S. Aggregate Index

Page 23: Creativity Session For The New Cash Forecast

Summarize

• Review ideas

• Check requirements and restrictions

• Trim list of features

• Identify preferences

Page 24: Creativity Session For The New Cash Forecast

Next Steps

• Describe what happens next:1. Research the ideas generated?2. Follow up with larger group or a

current standing committee? Would the Finance or audit committee be interested?

3. Generate project plan to start turning ideas into reality.


Recommended