1. Mark Silins TCOP Advisor
How does Cash Management and Forecasting Differ from Cash and Appropriation Control
Mark Silins
TCOP Advisor

2. Content Objective of Cash Management and Forecasting
Objective of Cash and Appropriation Control
Characteristics of the Two Activities
Convergence of the Two Activities
Why Forecasting and Control should not be a Single Activity

3. What is the objective of cash management and forecasting?
Cash Management has the objective of ensuring sufficient cash is available to execute the budget
Cash should be available just-in-time, neither too early, which results in idle cash balances, or too late, which results in unnecessary borrowing costs or arrears
Cash Forecasting is the process of estimating cashflows in the future to assist in targeting the cash balance

4. Simple cash forecasting model
Final Reports for Stakeholders
Reporting
(1)Integrating the cashflows and analysing the divergence to actuals for the year
(2) Extrapolating forward for the full year based on the cashflows achieved year to date
(3)Scenario Analysis
Analysis
Debt and Financial Asset Flows
Revenue Seasonality Tables
Ministry Cash Plans
Capital Project Plans
INPUTS

5. What is the objective of cash and appropriation control?
Maintaining budgetary control within the appropriation ceilings is the key objective in the year
To achieve this each ministry, department and agency must adequately plan cashflows, commitments and payables and ensure warrants/allotments are not breached during the year
Ultimately all of this has the focus of contributing to the efficient and effective delivery against budgetary objectives

6. Cash and appropriation reporting and control

7. The characteristics of cash management and forecasting
Supported by models – the sophistication of which can improve over time
Typically undertaken in excel or specialized third party software to allow multiple models to operate and user defined reports to be produced
80/20 rule applies – near enough is good enough. No need for exact calculations. The focus should be on the major cashflows
Buffers used to protect cash balance against forecasting errors
The goal is to actively manage the “cash balance”. Rough and fine tuning becomes possible as access to shorter term financial instruments comes into play. Refer to Mike Williams’ presentation

8. The characteristics of cash and appropriation controls
Protecting the integrity of the parliamentary approval process
Controls are absolute – so reporting must be exact
Supported by timely reports not models
Used to undertake statutory reporting but also to monitor budget execution by ministries, departments and agencies
Data is normally entered into, and reports produced from, a (statutory) system – Financial Management Information System
Important to ensure financial data is verifiable from an internal (management) control and audit perspective
Forms the basis of budget execution reporting and financial statement reporting on a cash basis - including budget reporting and IPSAS 2 cashflow statements

9. Where do the two processes converge?
Forecasting helps inform where issues with cash controls may occur, for example, imminent breaches in warrants
Actual cashflow information is fed into the forecasting models to allow recalibration and extrapolation of the models to adjust for variations to the original forecast
A good model grows organically during the year based on the variations between the forecast and actuals – it is adjusted to reflect the evolving position and should not be locked into the original budget assumptions
Forecasting and cash control need more than cashflow information – tracking commitments and payables enhances information for both forecasting and control

10. Integrated budget execution (payment) process for cash forecasting and cash control
Requisition Stage- Likely to involve tendering processes based on the value of goods and services to be purchased
Stage 1
Decision to Purchase- Pre-commitment
Stage 2
Purchase Order (legal obligation)
Funds Control/Budget Commitment- Sets aside funds so that money can not be spent for other purposes
Stage 3
Goods or Services Delivered
Liability Recognized- (financial obligation)
Accrual - Accounts payable - Invoice matched to purchase order/commitment
Stage 4
Correctly Rendered Invoice received
Payment made on due date recognized both on an accrual and cash basis
Stage 5
Payment Pending in Accounting Systems based on Due date
Stage 6
Payment Made on the Due Date
Yes
(Possible) Stage 7
Budget Arrears
Payments are overdue No

11. How daily actual cash flows link into forecasting
Annual Forecast updated daily, weekly and monthly - structural focus
Monthly forecast Updated daily and weekly - structural Focus
Weekly forecast Updated daily - liquidity focus
Daily Actuals compared to Forecast - liquidity focus
While cash forecasting is ultimately focused on the short-term cash position, this also provides important early warning regarding structural issues in the budget and the underlying cash surplus/deficit target in the budget forecast. Monitoring the likely impact of variances in actual against the forecast is therefore very important

12. What happens when forecasting and controls are combined into a single process?
Where you mix two processes that have very different objectives you often dilute the results for both processes or one of the two becomes dominant
In this case, we frequently see cash controls dominating the process undermining the integrity of the forecasting system
Ideally the budget should be executed to achieve the best results for government, not dictated by central cash controls
In the past imperfect information due to timing issues with processing and reporting and lack of an FMIS frequently resulted in cash rationing. This combined with the absence of access to liquidity resulted in the Treasury controlling cash releases tightly centrally
Forecasting cash spending is not required if you centrally control cash releases and spending – ROSPICE. However, will this impact service deliver and budgetary outcomes?
Forecasting revenues will always be required given the external nature of the sources and the factors that can influence the timing of receipts

13. What happens when forecasting and controls are combined into a single process? (2)
Traditional ROSPICE is focused on central controls not decentralized spending based on needs
This type of top down approach will interfere with a responsive budget execution process. For example all cash is released as 1/12th each month or 25% for the quarter. What happens where you need to purchase medical supplies 12 months in advance, or invest in a large capital item?
In such cases the releases must accumulate until sufficient funds are available in the cash releases. Therefore spending clusters towards the end of the year and is not made when the MDA needs the funds eg replacement of an ambulance needed in month one but adequate funds only accumulate in month nine. If cash rationing is also a feature the situation for MDAs is more dire
Modern FMIS today often see cash controls fully devolved to MDAs who register requisitions, commitments, payable and payments. All of these ensure strong cash and appropriation control as nothing is accepted in the FMIS unless funds are available
Cash management and forecasting can use the improved information in FMIS to allow the budget to be executed according to needs

14. Supplementary Budgets (revisions) and cash forecasting
Supplementary budgets should be informed by the evolving revenue position and forecast and through a realistic assessment of spending needs verses existing commitments
Budget revisions without a focus on the reality will result in an accumulation of arrears (late payments)
Budget Revisions to reduce spending late in the year are frequently ineffective because it is too late to reduce commitments
This is why forecasting is so important – it should help to provide early warning regarding structural issues with the budget – eg the forecast shows systemic issues in the budget which will increase the budget deficit unless offsetting actions is taken
Budget revisions will also have a top down impact on forecasts

15. Most MDA forecasting for spending is actually relatively simply
Flows with Certain Timing
Salaries/Pensions
Social benefits
Subsidies
Grants
Debt Servicing amortization and interest
Utilities
Centralized procurements
Residual Elements requiring planning and forecasting
Other goods and services
Capital spending
It is the revenues both tax (90%) and non-tax (10%) which create the biggest challenge in the forecast

16. Improving cash planning and how it can support forecasting
Procurement Plans and Cash Plans – submitted by MDAs based on expected needs not centrally determined
Commitments based on plans in FMIS
Ensuring goods and services are recorded as received (payables) in FMIS
Due Date – if 30 days, planning and the forecast know with certainty what will be paid for the next 30 days. Ideally this is in FMIS
Payment on the due date by the FMIS
No arrears will accumulate if cash forecasting ensures cash is available just-in-time to pay on the due date

17. Integrated budget execution (payment) process optimising information for cash forecasting and cash control
Requisition Stage- Likely to involve tendering processes based on the value of goods and services to be purchased
Stage 1
Decision to Purchase- Pre-commitment
Stage 2
Purchase Order (legal obligation)
Funds Control/Budget Commitment- Sets aside funds so that money can not be spent for other purposes
Stage 3
Goods or Services Delivered
Liability Recognized- (financial obligation)
Accrual - Accounts payable - Invoice matched to purchase order/commitment
Stage 4
Correctly Rendered Invoice received
Payment made on due date recognized both on an accrual and cash basis
Stage 5
Payment Pending in Accounting Systems based on Due date
Stage 6
Payment Made on the Due Date
Yes
(Possible) Stage 7
Budget Arrears
Payments are overdue No

18. Conclusions
While cash forecasting and cash control both focus on cashflows, they have different objectives and requirements
Different processes are required for each activity given the differences – ideally they should not be integrated
There is also a risk of MDAs gaming the forecast if they think it will be used by MoF to centrally control spending decisions
Where countries integrate the two processes control tends to dominate and directly impact service delivery and results
The role of the modern Treasury in many cases should see a shift from central cash controls (this shifts into FMIS and to MDAs) to cash forecasting.