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Creativity Session For The New Cash Forecast


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Creativity Session For The New Cash Forecast

  1. 1. Creativity Session for the new cash forecast Brian Shelton
  2. 2. Agenda <ul><li>Reaffirm business problems, a.k.a. information gaps </li></ul><ul><li>Concepts </li></ul><ul><li>Ideas </li></ul><ul><li>Refine/Discuss </li></ul><ul><li>Next steps </li></ul>
  3. 3. Preliminary Meeting Comments <ul><li>Conceptual Traits </li></ul><ul><li>Simple </li></ul><ul><li>Not perfection – get 80% accuracy and 80% of the elements </li></ul><ul><li>Wide tolerance </li></ul><ul><li>Easy extraction of historical data as it will be used 2 to 3 times per month </li></ul><ul><ul><li>Update should be limited to 8-16 hours per quarter for update </li></ul></ul><ul><li>User profile includes Joe D’Anna, Steve Lynne, Roger Beaty, Brian Shelton – so Intermediate level is the LCD. </li></ul><ul><li>Maintenance Free </li></ul><ul><li>No extra time to use. </li></ul><ul><li>Operational liquidity is not the problem. </li></ul>
  4. 4. Preliminary Meeting Comments <ul><li>Specific outcomes </li></ul><ul><li>“ Optimize maturities” </li></ul><ul><li>“ Minimize risk of selling early to meet capital investment needs” </li></ul><ul><ul><li>“ Look out more towards the 3-5 year horizon” </li></ul></ul><ul><li>“ Remove guesswork and speculation about cash available for larger capital needs” </li></ul><ul><li>Requirement: A capital investment cash available quarterly </li></ul><ul><li>Rebalance our portfolio because we tend to have too much liquidity and working capital </li></ul><ul><ul><li>Comment: “structure of portfolio has not adjusted to meet our spending needs” </li></ul></ul><ul><li>Remove risk of mistiming our capital expenditures and losing principal. </li></ul><ul><ul><li>“ Cashing out prior to maturity” </li></ul></ul>
  5. 5. Clarification of Comments <ul><li>Would there be potential users on the Utilities side? </li></ul>
  6. 6. Concepts <ul><li>Recommended Practice of GFOA </li></ul><ul><li>Matching </li></ul><ul><li>Target balance </li></ul><ul><li>Target capital structure </li></ul><ul><li>Cash Box </li></ul><ul><li>Pro Forma </li></ul><ul><li>Cash Budget </li></ul><ul><li>Financial Performance Measures </li></ul>
  7. 7. Recommended Practice of GFOA <ul><li>Use of Cash Flow Forecasts in Operations (2005 and 2008) states: “Cash flow forecasting is distinct from governmental accounting and budgeting” </li></ul><ul><ul><li>“ Ultimate goal is to mitigate the need for short-term borrowing or liquidation of securities before maturity” </li></ul></ul><ul><ul><li>“ Should be done organization wide to see all spending patterns that may impact potential shortfalls and excess balances.” </li></ul></ul>
  8. 8. CONCEPTS - Matching <ul><li>Matching – purchase securities that mature when funds are required to meet obligations </li></ul><ul><ul><li>Requires careful cash forecasting </li></ul></ul><ul><ul><li>Requires careful identification of capital requirements, including the impact on the operating budget (GFOA Recommended Practice Budget and CEDCP 2008) </li></ul></ul>
  9. 9. CONCEPTS – Forecast Dynamics <ul><ul><li>Target Capital Structure – mix of debt vs. cash/fund equity to finance capital outlay </li></ul></ul><ul><li>Target Investable Balance – identify the available cash balance target net of collateral or reserve requirements </li></ul><ul><li>IDEA: An alert trigger based on expected project amounts and durations. </li></ul><ul><ul><li>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.” </li></ul></ul>
  10. 10. Forecast Model Ideas <ul><li>Cash Box </li></ul><ul><li>Pro Forma </li></ul>
  11. 11. Cash Box Concept <ul><li>Benefits – from Comments </li></ul><ul><ul><ul><li>Not perfection – get 80% accuracy and 80% of the elements </li></ul></ul></ul><ul><ul><ul><li>Wide tolerance </li></ul></ul></ul><ul><ul><ul><li>Easy extraction of historical data as it will be used 2 to 3 times per month </li></ul></ul></ul><ul><ul><ul><ul><li>Update should be limited to 8-16 hours per quarter for update </li></ul></ul></ul></ul><ul><ul><ul><li>Maintenance Free </li></ul></ul></ul><ul><ul><ul><li>No “extra” time to use. </li></ul></ul></ul><ul><li>Limitations </li></ul><ul><li>Doesn’t remove risks of mistiming capital expenditures and losing principal </li></ul><ul><li>Forecast is really valid only over a short term 12-month horizon </li></ul>
  12. 12. What is the “Cash Box”? <ul><li>Monthly/Quarterly Use – Forecasts 13 weeks based on averaged historical data </li></ul><ul><li>3 schedules </li></ul><ul><ul><li>Receipts Schedule (all sources) </li></ul></ul><ul><ul><ul><li>Includes AR Balance Pattern </li></ul></ul></ul><ul><ul><li>Disbursements Schedule (all uses) </li></ul></ul><ul><ul><ul><li>Includes AP based on % of dollars to clear </li></ul></ul></ul><ul><ul><li>= Net Cash Flow; 13 week CASH BOX </li></ul></ul><ul><ul><ul><li>Net flows, beginning & ending cash balances, target balance , deficit/surplus – </li></ul></ul></ul><ul><ul><ul><li>Forecast on a rolling 13 week basis . </li></ul></ul></ul>
  13. 13. The Cash Box – can be done for each fund or major cash account Simple for our monthly use.
  14. 14. What is the Pro Forma Forecast? <ul><li>Advantages </li></ul><ul><ul><li>Takes a view on likely interest rates </li></ul></ul><ul><ul><li>Best for Longer term capital budgeting </li></ul></ul><ul><ul><li>Uses Excel spreadsheets </li></ul></ul><ul><ul><li>Allows development of the cash budget </li></ul></ul><ul><ul><li>If used, can help minimize risk of selling early to meet capital investment needs towards the 3-5 year horizon </li></ul></ul><ul><ul><li>Removes guesswork about cash available for larger capital needs </li></ul></ul>
  15. 15. Pro Forma Forecast, advantages cont’d <ul><li>Ancillary Benefit </li></ul><ul><ul><li>Puts capital needs in clear context of other relationships with cash, capital structure, investments. </li></ul></ul>
  16. 16. CONCEPTS – Pro Forma Forecast Model <ul><li>Cons </li></ul><ul><ul><li>Complex </li></ul></ul><ul><ul><li>Takes expertise to update and may require more than 1 expert’s input </li></ul></ul><ul><ul><li>Doing this does not change the structure of our portfolio </li></ul></ul>
  17. 17. CONCEPTS – Pro Forma Forecast Model <ul><li>6 schedules if Countywide – 3 if Governmental only </li></ul><ul><ul><li>3 for Proprietary Funds </li></ul></ul><ul><ul><ul><li>Statement of Net Assets </li></ul></ul></ul><ul><ul><ul><li>Statement of Revenues, Expenses and Changes in Net Assets </li></ul></ul></ul><ul><ul><ul><li>Combining Statement of Cash Flows </li></ul></ul></ul><ul><ul><li>3 for the Governmental Funds </li></ul></ul><ul><ul><ul><li>Balance sheet </li></ul></ul></ul><ul><ul><ul><li>Statement of Changes in Net Assets </li></ul></ul></ul><ul><ul><ul><li>Combining Statement of Cash Flows </li></ul></ul></ul>
  18. 18. Ancillary Discussion items <ul><li>Financial ratios as performance measures </li></ul><ul><li>Upload of the current portfolio into Bloomberg tools </li></ul><ul><li>Development of a “Cash Budget” as part of the annually adopted budget </li></ul><ul><ul><li>Increase interest income? </li></ul></ul><ul><ul><li>Retire or amortize debt early? </li></ul></ul><ul><ul><li>Take advantage of vendor discounts? </li></ul></ul>
  19. 19. Financial Performance Measures <ul><li>Asset Management Efficiency </li></ul><ul><ul><li>Total Asset Turnover </li></ul></ul><ul><ul><li>Fixed Asset Turnover </li></ul></ul><ul><ul><li>Current Asset Turnover </li></ul></ul><ul><li>Liquidity </li></ul><ul><ul><li>Stress Test annually in the ST forecast (aka “contingency funding plan”) </li></ul></ul><ul><ul><li>Acid Test Ratio </li></ul></ul><ul><ul><li>Cash Flow to Total Debt </li></ul></ul>
  20. 20. Financial Performance Measures <ul><li>Fund Performance </li></ul><ul><ul><li>Residual Income </li></ul></ul><ul><ul><li>WACC </li></ul></ul><ul><ul><ul><li>cost of debt + cost of equity </li></ul></ul></ul><ul><li>Capital Project Evaluation </li></ul><ul><ul><li>Payback period </li></ul></ul><ul><ul><li>Cash Flow Index </li></ul></ul><ul><ul><li>Lease vs. Buy </li></ul></ul>
  21. 21. Financial Performance Measures <ul><li>Banking relationship </li></ul><ul><ul><li>Scorecard evaluation </li></ul></ul><ul><ul><li>CAMELS ratings </li></ul></ul><ul><li>Investment Portfolio Risk </li></ul><ul><ul><li>Beta , for example </li></ul></ul><ul><ul><ul><li>0.0 - .1 at 360 days or less </li></ul></ul></ul><ul><ul><ul><li><0.1 at 1-3 yrs </li></ul></ul></ul><ul><ul><ul><li>< 0.2 at 5 yrs </li></ul></ul></ul><ul><ul><ul><li><0.3 at 10 yrs </li></ul></ul></ul>
  22. 22. Financial Performance Measures <ul><li>Portfolio Performance </li></ul><ul><ul><li>CME Barclays Capital US Aggregate Bond Index, in trailing 1, 3, 5 and 10 year annualized index returns </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>exceptionally broad-based </li></ul><ul><ul><li>more than 9,200 issues </li></ul></ul><ul><ul><li>market value of over $9.4 trillion securities (as of August 1, 2007) </li></ul></ul><ul><li>components include: </li></ul><ul><ul><li>Debt instruments representing U.S. Treasury, government-related, corporate, mortgage-backed securities </li></ul></ul><ul><ul><li>Asset-backed securities and commercial mortgage-backed securities </li></ul></ul><ul><li>More than 90% of U.S. money managers are benchmarked to the Barclays Capital Indices </li></ul><ul><li>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 </li></ul>
  23. 23. Summarize <ul><li>Review ideas </li></ul><ul><li>Check requirements and restrictions </li></ul><ul><li>Trim list of features </li></ul><ul><li>Identify preferences </li></ul>
  24. 24. Next Steps <ul><li>Describe what happens next: </li></ul><ul><ul><li>Research the ideas generated? </li></ul></ul><ul><ul><li>Follow up with larger group or a current standing committee? Would the Finance or audit committee be interested? </li></ul></ul><ul><ul><li>Generate project plan to start turning ideas into reality. </li></ul></ul>