Creativity Session For The New Cash Forecast
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Creativity Session For The New Cash Forecast

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    Creativity Session For The New Cash Forecast Creativity Session For The New Cash Forecast Presentation Transcript

    • Creativity Session for the new cash forecast Brian Shelton
    • Agenda
      • Reaffirm business problems, a.k.a. information gaps
      • Concepts
      • Ideas
      • Refine/Discuss
      • Next steps
    • 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.
    • 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”
    • Clarification of Comments
      • Would there be potential users on the Utilities side?
    • Concepts
      • Recommended Practice of GFOA
      • Matching
      • Target balance
      • Target capital structure
      • Cash Box
      • Pro Forma
      • Cash Budget
      • Financial Performance Measures
    • 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.”
    • 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)
    • 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.”
    • Forecast Model Ideas
      • Cash Box
      • Pro Forma
    • 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
      • Doesn’t remove risks of mistiming capital expenditures and losing principal
      • Forecast is really valid only over a short term 12-month horizon
    • 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 .
    • The Cash Box – can be done for each fund or major cash account Simple for our monthly use.
    • 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
    • Pro Forma Forecast, advantages cont’d
      • Ancillary Benefit
        • Puts capital needs in clear context of other relationships with cash, capital structure, investments.
    • 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
    • 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
    • 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?
    • 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
    • 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
    • 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
    • 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_about.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
    • Summarize
      • Review ideas
      • Check requirements and restrictions
      • Trim list of features
      • Identify preferences
    • Next Steps
      • Describe what happens next:
        • Research the ideas generated?
        • Follow up with larger group or a current standing committee? Would the Finance or audit committee be interested?
        • Generate project plan to start turning ideas into reality.