Executive Cash Management

Executive Cash Management

Maintaining solvency

Tools for Decision-Making

Executive Cash Management © Mission Systems, Inc. 2015

2Executive Cash Management

Fred Marshall, Ph.D, P.E.Mission Systems, Inc.

(360) 642-2073(503) 791-5773


3Classical Definition: Cash Management

“The corporate process of collecting, managing and (short-term) investing cash. A key component of ensuring a company’s financial stability and solvency.”


4Examples of staff-level cash management

• Choosing appropriate institutions for holding cash – a small part. (Assumes you have cash).

• Getting the best rates of return - a small part.(Assumes you have cash).

• Managing cash flow - a refinement once you get going.



• What are our cash objectives?

• How do we determine those objectives?

• How do we manage meeting those objectives?

• How do we track them?



Setting objectives:

• Is a risk-balancing exercise.

• Is a key element in budget making

• Challenges affordability



Bringing it Home

• Cash reserves are like savings accounts• The more you save today, the less you can spend today• There’s always conflict / tension – a good thing• You can’t save if expenses match revenues• To create reserves, there must be a budget surplus


8Objective-Setting – Working Cash

• The annual budget is a plan to come out OK at year end

• Timing of expenses and revenues causes fluctuations

• Fluctuations can cause you to run out of cash.

• “Working cash” reserve to buffer cash flow.

9Objective-Setting – Working Cash

• Working cash reserve is 6 weeks of expense or 12.5%

• In Washington State, a 12.5% requirement – no choice

• For a $1M budget = $125,000 on January 1st

• Objective-setting is easy as there’s no choice

• With no choice, it takes priority over any other reserves.Executive Cash Management © Mission Systems, Inc. 2015

10Objective-Setting – Emergency Reserve• Revised Code of Washington

RCW 35A.33.145 Contingency fund — Creation.

• Every code city may create and maintain a contingency fund ……

PROVIDED, That the total amount accumulated in such fund at

any time shall not exceed the equivalent of thirty-seven and

one-half cents per thousand dollars of assessed valuation of

property within the city at such time. Executive Cash Management © Mission Systems, Inc. 2015

Objective-Setting – Emergency Reserve

• Emergency Reserve is a form of “ready insurance” for unforeseen circumstances. • The ability to grow Emergency Reserves means that the

current Reserve buys time to recoup.• The need for an Emergency Reserve is only offset by

insurance policies to a limited degree. e.g. Equipment failures are generally not insured.• Among other reserve amounts, the Emergency Reserve

may have the lowest relative priority.


11


12Short-Lived Asset Replacement ReserveImagine the budget split into categories:

1. Expenses built into the budget (Operations and Maintenance )(Current cash flow requirements)

2. Expenses for mid-sized and short-lived asset replacement (“depreciation”)

(Both current and, future cash flow “savings”)

3. Large and long-lived asset replacements via debt financing.

(Implies future cash flows for debt service)


13Short-Lived Asset Replacement Reserve• “Seat of the pants”, pay as you go approach is all

too common

• Yet, large cash requirements loom that won’t be debt-financed

• Selecting the assets and managing for their replacement is a real management task

• Cash position management is a necessary element


14Short-Lived Asset Replacement Reserve

• The challenge is to balance cash requirement vs. asset replacement

• Easy to lose the picture of why that cash is there

• Too much saved-up cash becomes attractive

• Smooth the cash buildup and reductions!


15 Short-Lived Asset Replacement Reserve

• 2nd in priority

• Below working cash reserve because working cash is required!

• Above of emergency reserve because the need is “provable”.


16Reserves: Visibility and Protection

• Formalize the objectives

• Formalize financial reporting

• Make reserve management an integral part of budgeting


17What Should We Expect?

• There are up-front challenges when reserves don’t exist

• Expenses have been “pushed forward”

• Once working cash and emergency reserves are established and maintained, there would be no ongoing contribution from operations.

• If short-lived assets can be funded according to the annualized demand, then it becomes “institutionalized” in the budget – much like an ongoing expense: e.g. “Electricity”.


18Approaches

• Build working cash reserve first. Not starting from zero. It may already be there.

• Build emergency reserve and short-lived asset reserves in parallel. Not starting from zero. Some short-lived asset replacement has always been in the budget.

• Translate the budget from ad hoc replacement to planned replacement.


19It’s All Good

• Cash in the General Fund is fungible. i.e. it doesn’t matter what we call it or what labels we attach.

• BUT: with focus on each objective, it’s much more likely to succeed.

• Opportunity for meeting cross-reserve objectives with less total cash. An opportunity for balance.


20Available Tools

• Generate and manage Short-Lived assets with:• Advanced 50-yr cash requirements projection FOR

VISIBILITY• Frequent updates allow shorter horizon• Cash flow projections• Cash injection adjustments• Cash strategies

• Budgets are structured to highlight reserves (so they aren’t forgotten)• Budgets are structured to highlight changes to reserves

(and expense challenges)


21Planning Cash for Asset Replacement

Asset Replace in (YR)

Life Value Annual $

2016 2017 2065

A 2016 5 $10,000 $2,000 $10,000 0B 2015 20 $20,000 $1,000 0 0 $20,000C 2021 6 $30,000 $5,000 0 0D 2025 10 $40,000 $4,000 0 0 $40,000E 2026 7 $50,000 $7,143 0 0

Total $19,143 $10,000 0 $60,000


22Resulting Cash Projection

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

2056

2058

2060

2062

2064

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

Balance with $19,143/a Contribution to Reserve



2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

2056

2058

2060

2062

2064

($150,000)

($100,000)

($50,000)

$0

$50,000

$100,000




2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

($40,000)

($20,000)

$0

$20,000

$40,000

$60,000

$80,000

$100,000




2016 2017 2018 2019 2020 2021 2022 2023 2024 2025($5,000)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000


Series1


26Planning Cash for Asset Replacement

• After the analysis and adjustments, a plan results.

• The plan determines the annual cash contribution to be made.

• The plan determines the budget year ending cash balance.


27Budget Structure – How to Track the ReservesRevenue Expense- $X - $E- _____________ $Y - $FOperational $Z - Asset

Replace$75,000

$A Operational- _____________ $B - $MNon-Operational

$C - _____________ $N

Non-Operational

$O

Total Revenue $1,000,000 Total Expense $900,000Net In/Out $100,000

Reserve Jan 1 Budget Change

Dec 31 Objective Over/Under

Working Cash

$125,000 $0 $125,000 $125,000 $0

Asset Replace

$90,000 $60,000 $150,000 $150,000 $0

Emergency $50,000 $40,000 $90,000 $50,000 $40,000


28Budget Structure – How to Show the Reserves

• Rules for the structure:• Annual contribution to asset replacement is a

planned objective and results from the budget• If there is zero asset replacement expense in a year,

the annual contribution still must be per the planBudget surplus >= Annual contribution LESS asset replacement expense


29The Challenge

• Create realistic cash reserve objectives

• Dynamically manage them to meet overall financial needs

• Protect the organization from bankruptcy


30What Should We Expect?• The Board or Council will formally establish rational cash

objectives• The objectives will be a prominent part of the budget display• The Treasurer will provide the budget impact on the reserves

and compare the result to the objectives.• The Board or Council will decide what to do when there’s a

surplus and when there’s a shortfall• “What to do” is both a reserve allocation question and a

budget question.• Ongoing maintenance of “short-lived” assets lists and

adjustment of cash requirements.



Consultant: Fred C. Marshall, Ph.D.(360) 642-2073

[email protected]

Government & Nonprofit

Executive Cash Management