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Cash Budgeting & Investing Program
By Dr. James Terry Ph.D., CPA
Executive Director of Finance
North East Independent School District
8961 Tesoro Drive
San Antonio, TX 78217

1. THE OBJECTIVE OF CASH MANAGEMENT

A Cash Budget guides the investment manager in developing an investment strategy for maximizing yields on investments. The importance of cash budgeting and cash management cannot be over emphasized. The objective of cash management is to provide sufficient liquidity for all operating expenditures and to maximize the funds available for investment activities. An effective and efficient cash management system is critical to the smooth operation and existence of any business. To create a cash budget, an understanding of the revenue and expenditure characteristics is critical and necessary. Understanding the timing of cash revenues flows and expenditures flows is vital. Building a cash budget enables the investment manager to match cash inflows with cash outflows, position the manager to invest excess inflows to obtain a maximum yield on monies available, and to know when to fund for deficits.

1.1 Revenue Characteristics

Revenues are from local, state and federal sources in the government Sector. In the private sector income sources may vary but yearly income patterns also develop. In the NEISD example revenue has a specific seasonal pattern with the highest revenue in November and second highest in February. From March to September the revenue pattern is relatively flat. The graph depicts the revenue for 1996 through the 2000 fiscal years. It shows similar patterns for each fiscal year.

1.2. Expenditure Characteristics

Just as it is important to understand the cash revenue flows it is equally important to understand the cash expenditures needs. The understanding of cash flows is vital in funding expenditures and maximizing the available cash for investment purposes. Knowing when cash expenditures will exceed cash revenue is critical in developing investment strategies.

The Cash expenditures in this example, are classified in six different categories: 61XX

Payroll, 62XX Professional and Contracted Services, 63XX Supplies and Materials, 64XX Other Operating Expenses, 65XX Debt Service and 66XX Capital Outlay. The total amount of expenditure allocations for each fiscal year is vital. In the example this was $244,492,604, with the largest portion of the expenditures in Payroll almost 87% for the fiscal year.

The biggest expenditure in the example is payroll, to understand more about the characteristic of this cash expenditure you must break down Payroll expenditures into two categories: monthly and biweekly salaries.

A). Monthly Salaries

This is the biggest portion of the Payroll Expenditure. The total expenditure for certified salaries is approximately $14.7 million per month; this is paid at the end of every month, and most of these checks are direct deposits. From Table 1 below,

We can see the pattern of checks cleared. For the monthly salary checks, 84% are cleared on the same day the checks are issued, 9% and 6% are cleared on the second and third days after the issue date, respectively.

B). Biweekly Salaries

The amount of biweekly salaries is about $3.4 million per month. The pattern of checks cleared shows that 46% of these checks are cleared on the day after the issuing date. This occurs because most of these distributions are not direct deposits.

Table 1. The Pattern of Salary Checks Cleared

Checks Cleared on: Monthly Salary Checks Biweekly Salary Checks
1st Day Checks are Written 84% 24%
2nd Day Checks are Written 9% 46%
3rd Day Checks are Written 6% 29%

All other expenditures do not constitute a significant portion of NEISD’s cash expenditure, and they do not have a consistent pattern of disbursement. The importance of understanding the timing of your cash flows allows the cash manager to maximize the duration of investments, i.e., maximize interest income. A cash manager needs to analyze and develop a system to understand the cash flow. He must also understand alternative investment opportunities. The goal is to hold on to cash as long as possible to obtain the maximum yield on investments without jeopardizing good business and investment practices.

The name of the game is to keep all possible funds invested earning interest. Avoid other people from using your idle cash, as they say, cash never sleeps; if you are not earning interest on your cash, someone, else is. The next problem is to understand who is using your cash, how much are they making from your cash and how much can you make. The goal is to keep as much of your money as possible earning the maximum amount of interest for the organization.

A cash disbursement account is an effective type of account to use. A cash disbursement account is an account that passes your checks through a Federal Reserve Bank that is not local. This will allow your local bank to inform the investment manager each morning how much money is going to clear your depository bank. The cash manager then has the opportunity to move just enough money from the investment account to the bank checking account to fund what will clear. This leaves your money in your investment account earning interest longer. Other types of accounts may not be as effective and efficient but zero balance accounts and active cash management can have a similar effect.

2. DEVELOPING THE CASH BUDGET
Software programs have been developed to monitor the cash flows in and the cash flows out. The Cash Management Program in this example was developed using Lotus. The Cash Management Program contains three spreadsheets: The Daily Cash Management Spreadsheet Table IIa, IIb, and IIc, the Weekly Cash Flow Management Spreadsheet, Table III and IV, and the Cash Budget Table V. The Daily Cash Management Spreadsheet Table IIa, IIb and IIc are a tool used to record the daily cash transaction activities. Its purpose is to track cash flows, investments and to act as a tickler file for future cash inflows and outflows. The Weekly Cash flow Management Spreadsheet, Table III, summarizes the daily cash transactions into a weekly and monthly cash flow report. Using the Weekly Cash Flow Management Spreadsheet - you can monitor weekly forecasted cash receipts, weekly forecasted cash disbursements, weekly projected cash receipts from investments and interest, and forecasted cash excess or deficit. One primary purpose of this spreadsheet is to develop percentages of cash receipts and expenditures weekly to develop the proceeding year’s cash budget, Table V. See the Cash Management Program (Chart I) for an overview of the program. The Cash Budget Spreadsheet is helpful in developing investment strategies to improve your yield on investments.

2.1 DAILY CASH MANAGEMENT SPREADSHEET

Table IIa, IIb and IIc are examples of the Daily Cash Management Spreadsheet. You can examine this spreadsheet using four important functions: Cash Inflow, Cash Outflow, Investment Activities and Fund Collateralization. All the columns in this spreadsheet can be explained based on these functions as follows:

2.1A Cash Inflow Related Columns

  • Cash Flows into the Bank (NB) Table IIa — this column contains the cash revenue from Local, State and Federal sources.

  • Interest Earning Table IIa — this column contains all interest earned from investment, i.e., Money Market Funds (TEXPOOL, LOGIC, etc.) and other non-pool investment securities; this interest is recorded daily as cash flows in. The interest earned from pool investment securities, is directly reinvested in those pools at the end of every month. The cash is recorded for the non-pool investment securities, such as T-Bills, T-Notes and Agency Discount Notes on a schedule in advance until maturity. In discount securities, interest is recorded at maturity or sale of that security, i.e., as the cash flows in. The other securities usually pay the interest semiannually. By entering the future interest payment on the Cash Management Spreadsheet, the cash management manager can use the Cash Management Spreadsheet to monitor these dates to insure that interest earned on the appropriate day is received.

  • Sold/Mat. Investments Settlement Table IIa — this column contains all cash flows of sold or matured investments. As securities are purchased, their maturity value (face value) is recorded on the date of maturity. This column then can act as a reminder of when securities are to mature.

2.1B Cash Outflow Related Columns

  1. Payroll Activities

    • Checks Written Payroll Table IIb — this column shows payroll expenditures as reported each day by the Payroll Department.

    • P/R Cleared Table IIb — this column contains data that must be obtained from your

      local bank every morning.

    • P/R Checks Outstanding Table IIb — this column represents the amount of checks that have already been written but have not yet cleared.

    • A/P Activities

      • Checks Written A/P Table IIb — this column represents the amount of checks issued to be disbursed from Accounts Payable. The accounting department must supply this information every morning.

      • A/P Cleared Table IIb — similar to the P/R Cleared column, the amount in this column must be obtained from the bank.

      • A/P Check Outstanding Table IIb — this column represents the amount of float for Accounts Payable checks.

2.1C Investment Activities

Investment activities can be categorized into four important groups as follows:

  1. Investing the Excess Money

    The organization receives money from Local, State or Federal sources. This money increases the bank balance. After disbursing all the expenditures, the remaining balance is invested into pool investments or non-pool investment securities.

  2. Transferring the Funds among the Investment Alternatives

    These investment transactions are driven by the opportunity to obtain the highest return

    from the available securities in the market. The effect of these transactions to columns in the Daily Cash Management Spreadsheet are depicted on Table IIa.

  3. Covering Expenditures by Selling the Investments

    POOL’S such as LOGIC are highly liquid investment alternatives. You can withdraw money from pools daily. Pools, as liquid accounts, are used to cover the unexpected daily cash outlays. Non-pool securities are less liquid securities usually held to maturity

    or sold for gains as market conditions dictate. The investment manager carefully plans the maturity of the investments (non-pool securities) with the cash outlay needs to avoid price risk. Using the matching strategy, the investment manager matches the maturity with a forecasted cash outlay. This is done with the idea of holding to maturity unless there is an increasing interest rate market. Then a short roll approach may be taken, i.e., hold short reinvest.

  4. Earning Interest from the Investments

    The interest earned from the pools is directly reinvested into the pools. Because of this direct reinvestment method, the bank balance is not affected. The interest earned from non-pool investments is treated differently. Securities are purchased through a broker and kept in a safekeeping account at a bank. A safekeeping bank different from an organization’s depository bank will limit exposure. The safekeeping bank receives all interest from securities held in the district’s safekeeping accounts. If a safekeeping bank does not collateralize the organization’s money, the account must be used as a pass through account. The account is cleared out before the close of each day. The money may flow to the depository bank, where the money is collateralized or used to cover expenditures or be reinvested.

2.1D Fund Collateralized Activities Table IIc

To comply with the regulation that all governmental funds are fully collateralized, the cash manager maintains the legal requirement of collateral to cover all funds in the depository bank. Non-governmental businesses are not required to collateralize. However, it would be in their best interest to do so if at the cost of a few basis points they can be more secure. Every morning, the cash manager calls the bank to get the total balance. The cash manager maintains the excess collateral at not more than $1,000,000. When the average collateral pledged during a month, exceeds the 100% coverage of deposits plus the $1,000,000 collateral "cushion", the bank will charge the District a 25-basis point fee for the excess collateral. If the cash manager predicts that there will be an increase in the balance of accounts, the officer orders the bank to increase the collateral amount pledged from the current balance to the expected balance prior to a certain time in the day the deposits are actually received. Twenty-four hours notice is necessary on incremental deposits greater than $3 million. The related columns in the spreadsheet for these activities are the bank ledger balance, collateral, margin, collateral percentage and collateral average. The cash manager puts in the total balance in the bank and the collateral amount every morning after the manager gets the data from the bank report.

2.2 WEEKLY CASH FLOW MANAGEMENT SPREADSHEET Table III

The Weekly Cash Flow Management Spreadsheet is a weekly summary of the actual daily cash flows. It consists of three important sections: actual cash inflow, actual cash expenditure outflow and actual cash excess or deficit by week and month (See Table III).

2.2A Actual Cash Flow

The actual cash flow section consists of five sections (see Table III and IV). These tables contain the data from the previous fiscal year. This data is a weekly summary of the Daily Cash Flow Management Spreadsheet and is a percent of total receipts and expenditures for one year.

  1. Actual Cash Receipt Table III and Percentage Actual Cash Receipt Table IV

    The Actual Cash Receipt, Table III contains a weekly summary of daily actual cash receipts and actual cash disbursements from the previous fiscal year. Based on these tables, you can develop the Percentage Actual Cash Receipts and Actual Percentage Disbursements (Table IV), which are a weekly percentage of the actual cash receipts and disbursements from the previous fiscal year (see Table IV).

  2. Actual Cash Expenditures and Percentage Actual Cash Expenditures Tables The Actual Cash Expenditures Table contains a weekly summary of daily actual expenditures from the previous fiscal year. The Percentage Actual Cash Expenditures Table is developed by dividing the weekly actual expenditure by the total actual cash expenditure for the previous fiscal year. Based on these percentage tables, developing the Forecasted Cash Receipts and Forecasted Expenditures Tables for the next fiscal year is possible. Forecasting cash receipts and expenditures using a percentage method from data from the previous fiscal year is a simple and quick method to develop a cash budget. The rational for using the percentage method is followed:

    • The cash revenue has a similar inflow and outflow patterns each year

    • Using current date is a more accurate predictor

2.3 FORECASTED CASH BUDGET

The procedure for developing the Forecasted Cash Budget is to forecast the total cash receipts and the total cash expenditure for the following year. It is more accurate to forecast this number than to try and forecast individual weekly or monthly numbers. Using the total forecasted receipts and disbursement numbers, multiply these numbers by the percentage of Actual Cash Receipts and Actual Percent of Cash Disbursement for each week. This will give you a Forecasted Cash Budget based on the previous year cash flows. An illustration would be to multiply .226%, first week of September Table IV, times $340,760,938, found on Table V Forecasted Cash Receipts Total. The purpose of developing a Cash Budget is to determine cash available for investments on a monthly and weekly basis. This table also helps the investment manager match maturity with cash needs. The Cash Budget will help in determining the investment strategies to be used based on the interest rate forecast. After the Forecasted Cash Receipts are developed, it is combined with the Projected Maturing Investments. The Forecasted Expenditures are subtracted to develop the Monthly Cash Excess or Deficit (See Table V). The sum of the Forecasted Cash Receipt, and Projected Maturity Investments represents the forecasted cash excess or deficit for the year. The Forecasted Expenditures represent the forecasted cash outflow for that fiscal year. Subtracting forecasted cash outflows from the forecasted cash inflow results in the Forecasted Cash Excess or Deficit. From Table V, you can find the amount of the weekly or monthly Forecasted Cash Flow for the fiscal year. An organization can maintain pool investments or repurchase agreements to provide the liquidity necessary for day to day transactions. The beginning and ending balances of these pools are found on the lower part of the Cash Budget Table V. This table provides information that enables the cash management officer to maintain an effective cash flow and to optimize the cash flow through investment activities.

3. THE OBJECTIVES OF INVESTING
The objective of investments is to provide the funds for the cash needs of the organization to safely invest available cash, and maximize yields on investments. This objective is done in a manner to fully comply with local and state legal requirements.

A.) Safety of the Principal

The safety of the principal is the highest priority for all investment activities. Treasuries, Agencies and other securities as defined by local policy are purchased for the organization.

B.) Liquidity

The investment manager uses the Cash Flow Management Program to anticipate the cash outflow needs. Using this program the officer matches the investment maturity with the cash outlay needs. The investment portfolio is designed to accommodate the anticipated cash outlay.

Pools and repurchase agreements (repo’s) are used for short-term liquidity needs. The investment officer uses these investment instruments to provide for the immediate daily cash outlay needs.

C.) Relatively High Return

The investment portfolio should maximize yields. Comparison of portfolio performance to Ninety day T-Bills is a good indicator of the portfolio performance. The investment manager optimizes the investment return without sacrificing the safety, liquidity or the legal requirements. Moreover, the investment activities should be free from the speculative motive.

D.) Legality

Investment activities must fully comply with all the legal requirements.

3.1 Investment Functions

A tracking system for investments is critical.1 Every investment transaction must be recorded. The investment manager needs to maintain a copy of the investment transaction documents such as: trade ticket, transfer fund paperwork and a copy of the confirmation from the custodial safekeeping bank, etc. These documents contain the information of type of security, QUSIP number, the amount of an investment, interest rate or discount rate, maturity date and settlement date, a dealer name who sold the security and the tracking number. The investment manager needs to execute the investment transaction with the dealer, inform the custodial safekeeping bank to accommodate the investment transaction, transfer the funds and record the investment transaction. Every investment transaction uses delivery versus payment (DVP). It means that an inter-bank transfer of funds does not occur until the securities have been delivered to your Safekeeping account through the Federal Reserve system. Using Evare Investment Software, the investment manager creates a monthly investment report. At the end of every month, the investment manager needs to reconcile the investment transaction documents to the subsidiary ledger and to the general ledger investment account.

3.2 Custodial Safekeeping

An organization needs to establish a third party safekeeping bank. The bank will secure all original document securities and will issue a written confirmation of every investment transaction. Every time an investment security matures, the investment officer needs to instruct the safekeeping bank to transfer that funds outs, unless a collateral agreement is in effect to cover funds left in the bank. A Cash Management Program helps the investment officer in tracking maturing investments.

4. INVESTMENT ACTIVITIES
The investment manager needs to monitor the national and international economic conditions, the capital market trends — especially for fixed income market, and other economic indicators such as: CPI, GDP, employment rate, etc. This information is important to anticipate the interest rate movement. Using the Cash Budget Spreadsheet Table V, the investment manager can determine the cash needs of the organization on a weekly and monthly basis. The investment manager uses this spreadsheet to match maturity of the investments with cash flow needs. If the manager determines interest rates are rising, he can take advantage of a short roll. Investing short to reinvest as money matures to gain a yield on raising rates. If the investment manager determines that the rate moves to the opposite direction, he would go long and buy securities to match the end of year first than buy short term instruments later. If the fund balance is viable, the investment manager might invest 10% to 20% to take advantage of the yield curve.

Before buying securities, the investment manager must evaluate the credentials of brokers and companies before doing business with them. The investment manager must develop and maintain a relationship with several brokers to get the best bids for investment purchases. Updated information from the market, investment advice and selection of securities is a benefit of maintaining a good relationship with brokers.

4.1 Investment Procedure

Below is a short explanation of the investment procedure that the investment manager does. These procedures are used when considering an investment. First, check the interest rate in the market using investment software to have an initial indicator of prices, types of securities and maturity dates. Using this information, the investment manager asks several brokers for their bids or price of similar securities with the similar attributes (type and maturity). Compare the yield of those securities and choose the highest yield from the available quotations. If the investment manager decides to buy that security, ask the brokerage company to issue the trade ticket. When securities are selected, the investment asks brokers to fax relevant information. Using this information, the investment manager can recheck the yield and other information the broker quoted using investment software. If the yield and price are correct, the security is recorded as a transaction. The investment manager informs the Safekeeping Officer at the bank to settle the investment transaction. This is done on a delivery versus payment (DVP) basis. The bank is informed of the following: the QUSIP number of the security, the amount of the investment settlement and the name of the brokerage company through which the security was bought. This information is faxed to the safekeeping bank. Transfers of money from the source accounts (pool or bank account) to the safekeeping bank can be done using repetitive wire instructions. The investment officer then writes the appropriate accounting journal entries. The investment officer calls the safekeeping bank to confirm that the investment transaction has been settled.

After investments are purchased, they are inputted into the tracking system. Documentation is kept in an active Journal Book until maturity. At maturity or sale date, it is pulled and kept in the Matured Sold Journal Book. The investment manager uses the Daily Cash Management Spreadsheet to track the maturity of the investments. When securities are sold or matured, the safe keeping bank is contacted to be sure money is available. Using the safekeeping bank software and modem communication or telephone, money is transferred to other investments or to the depository bank.

Using good cash budgeting, managing and investing techniques an organization can probably increase their bottom line by 10%.

Please contact James Terry, North East Independent School District, 8961 Tesoro Drive, San Antonio, TX 78217 or phone 210/804-7111 ext 389 should you like a copy of the Cash Management Program.