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Cash Management Workshop: Organization and Communication

Gail Ostler of the US Treasury, Office of Technical Assistance, recommended how cash management should be organized in governments. She described the responsibilities of the cash management unit:

• Forecasts, monitors and tracks cash flows
• Prepares cash flow reports and identifies and reports on variances
• Provides leadership and direction to all ministries / departments on cash management issues
• Develops and maintains cash management policies and procedures
• Recommends improvements in all aspects of cash management to strengthen internal controls and enhance available cash balances
• Prepares risk and cost benefit analysis
  
• Maintains banking relationships
  

Ms. Ostler pointed out that leadership is the most critical responsibility for cash management units. She suggested that many government cash management units do not proactively recommend improvements. She described the qualifications needed to be an effective cash manager. The ability to communicate is critical to be effective, according to Ms. Ostler.

A slide showing the flow of information needed in cash management was presented by Ms. Ostler. It is important to know when there will be large pieces of revenue coming to the government. Information sources include:

• Banking System (Commercial and / or Central Bank)
• Accounting System
• Budget Spending Quotas, Plans and Amendments
• Reports Monitoring Budget Execution
• Macro-Economic Forecasts
• Major Budget Institutions (Exception Reporting)
• Revenue Institutions (Exception Reporting)
• Debt Unit

Ms. Ostler stressed that information from big spending units is critical to cash management. She described the use and purpose of cash management committees.

What is Government Cash Management

Gail Ostler of the US Treasury says the financial crisis has created a significant awareness of the cash management. She believes that many PFM experts have a narrow view of cash management. Cash management is much more than cash flow forecasting or Treasury Single Accounts. Ms. Ostler defines cash management as "having the right money in the right place at the right time to meet government objectives."

Cash Management Objectives

Ms. Oslter said that the objectives of cash management include cash mobilization, controlled disbursements, investing money and reduce borrowing. Other objectives include:

• Safeguard cash and investment
• Minimize the volume of idle balances
• Match the timing of cash inflows and cash outflows
• Reduce operational risk
• Pay vendors on time because late payments increases the cost of goods and services.
• Reduce the cost of borrowing
• Minimize transactions costs
• Increase investment income

What Cash Management Is Not

Ms. Ostler pointed out that cash management is not a substitute for poor budgeting decision. It is not a substitute for spending in excess of budget authority or any form of budget and accounting controls. Many governments have incorrectly managed budgets through cash management according to Ms. Ostler. Many governments use Ministry bank accounts to attempt to control budgets. The result is that the government loses cash control. Ms. Ostler advocates that cash management must be delinked from budget controls.

Results of a Poorly Defined Program

Ms. Ostler articulated the problems associated with poorly defined programs, particularly those resulting from the proliferation of both private and central bank accounts. Other poor results include:

• Restrictions of the use of cash often results in unnecessary borrowing or lost investment income
• Impossible to reconcile all accounts
• Treasury isolated from cash information
• Thwart central bank monetary policy
• Cash rationing that prevents proper budget execution
• Overly expensive bank changes

Components of a Strong Program

Ms. Ostler defined the components of a strong program including:

• Written policies and procedures
• Strong cash management organization
• Bank relationships
• Reduction of bank accounts
• Collections made through the banking system
• Deposit accounts swept daily to central government accounts
• Treasury performs centralized payments
• As many payments as possible should be electronic
• Cash disbursements eliminated or minimized
• Ministries and agencies penalized for making commitments outside of their budget authority
• Full cash flow forecasting, on a 12 month roll-forward basis
• Follow-up on variances between cash flow forecasts and actual payments
  

Ms. Ostler advocates strong banking relationships where the government is managing the relationship with banks. She pointed out that many governments do not use spending plans effectively. The surprises in disbursements relate to large infrastructure and capital projects. It is difficult for Ministries to stick to spending plans. She advocates the use of exception reporting. Governments can look at these large projects and find ways to match expenditure with revenue patterns.

Many cash managers analyze information in their offices according to Ms. Ostler. She advocates being proactive and understanding where there are cash is coming from. Ms. Ostler advocates that governments should look at the banking relationships in other countries.

Ms. Ostler responded to a question about deficits. She says that managing cash when there is not cash means looking at systemic issues. Governments need to reduce expenditure budgets when there are revenue shortfalls.

Procurement linkage with commitments is needed for effective cash management according to Ms. Ostler. Many long-term projects have multiple year commitments. She advocates linking with government commitment accounting systems.

Ms. Ostler said that there are ways to allow ministries to manage projects that are tied to revenues the ministry has collected without giving them cash control and separate bank accounts.

Lessons Learned from Performance Based Budgeting in Latin America

From the Culture of Control to Culture of Performance
Mario Saginés, Senior Advisor, Institutional Capacity and Finance Sector, Inter-American Development Bank described Performance Based Budgeting for government. Mr. Saginés provided insight from experience in Latin America.

PBB does not mean that countries always allocate based exclusively on results. He described four necessary components are: performance information, the use of information in budgetary exercises, incentives for managers to reach goals, and increasing management skills. Management in government can be restricted by rules from making decision. That way, managers can be held accountability.

The benefits of PBB include improved accountability, government services, and efficiencies. PBB brings budgeting in line with government objectives. Mr. Saginés showed graphs that showed how countries with a lower income tend to collect revenues at a lower ratio to GDP. Many Latin American countries spend more than many countries yet achieve poorer results.

Mr. Saginés pointed out that many PBB initiatives are started by bad reasons. For example, PBB should not be used to increase controls because it limits the ability to manage based on performance frameworks. Excessive detailed management is often legally required. This reduces flexibility. He recommends a more macro approach. PBB has become fashionable in the donor community. Mr. Saginés suggests that this should the only reason to implement PBB. He questioned whether accrual budgeting is required to have effective performance based budgeting.

There is a broad menu of PBB framework options. Some countries use more performance measurements to set budgets than others. There is no established model. Mr. Saginés suggested that a practical middle ground is appropriate for most countries. He recommended against using allocation formulas based on performance results.

Many countries use program-based performance budgeting. He cautioned that the concept of “program” is not universally understood. Program budgeting can be complex to manage.

Budget execution for PBB requires culture change. It can be a long and painful process. Mr. Saginés presented details from PBB experiences in Latin America.

Many countries focus on indicators but not on using these to determine resource allocation. A radar graph showing 5 measurements for results-based management was shown. Performance based budgeting and monitoring in Latin America is not as advanced as general financial management.

Monitoring and evaluation is required for effective PBB. Mr. Saginés recommends the use of performance results during budget deliberations. This does not mean that allocations should be directly related to performance. Performance is one of the characteristics that must be used during budget preparation.

1.30 2.30pm Embarking On Perf Mgmt Latin America (Mario Marcel)

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1.30 2.30pm Embarking On Perf Mgmt Latin America (Mario Sangines) English

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1.30 2.30pm Embarking On Perf Mgmt Latin America (Mario Sangines) French

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Kevin Page answers ICGFM Delegate Questions

Kevin Page, Parliamentary Budget Officer of Parliament of Canada, answered ICGFM conference delegate questions about data quality in budget analysis and good practices in legislative budget offices.