27153436-“cash-Management”-at-Indian-Oil-Corporation-Ltd.pdf

7/27/2019 27153436-cash-Management-at-Indian-Oil-Corporation-Ltd.pdf

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CASH MANAGEMENTAT INDIAN OIL CORPORATION LTD.

Dissertation Submitted to thepadmashree dr. D.Y.Patil UniversityIn partial fulfillment of the requirement for the award ofthe Degree of

MASTERS IN BUSINESS ADMINISTRATION

Submitted by:-URVISH PATEL(Roll No.163)

Research Guide:Ms.NITU SHARMALecturerDepartment of Business ManagementPadmashree DR. D.Y. Patil University

CBD Belapur, Navi MumbaiFEBRUARY 2010

CASH MANAGEMENTINDIAN OIL CORPORATION LTD.

DECLARATION

I herby declare that the dessertation CASH MANAGEMENT AT INDIAN OIL CORPORATIONLTD. submitted for the MBA degree at Padmashree Dr. D.Y. Patil University Department Of Business Management is my original work and the dissertation has notformed the basis for the award of any degree, associate ship, fellowship or anyother similar titles.

Place : mumbaiDate :

Signature of the student

CERTIFICATE

This is to certify that the dissertation entitled CASH MANAGEMENT AT INDIAN OIL CORPORATION LTD. is the bonafide research work carried out by Mr. URVISH PATE


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L student of MBA, at Padmashree Dr. D.Y. Patil University Department Of Business Management during the year 2008-2010, in partial fulfilment of the requirements for the award of the degree of master in business management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title.

Signature of the Director signature of the guide

(DR. R. GOPAL )

Place: MumbaiDate:

ACKNOWLEDGMENTS

In the first place, i thank Prof. Nitu sharma, lecturer, Padmashree DR. D.Y. Patil University Department of Business Management, Navi Mumbai for having me her valuable guidance for the project. Without her help it would have been impossiblefor me to completed the project.

I would also like to thank the various people from the ManufacturingIndustry who have provided me lot of information and in fact even sharing someof the confidential company documents and data-many of which i have used in thisreport an without which this could not have been completed.

I would be failing in my duty if I do not acknowledge with a deep sense of gratitude the sacrifices made by my parents and thus have helped me in completing the project work successfully.

Place:Date:

Signature of the student

TABLE OF CONTENTS

SR.NO. CHAPTER NO. TITLE1. List of figures2. List of tables3. List of Abbreviation

1. Executive Summary2. Objective of the study3. Research Methodology4. cash management

4.1) introduction of Cash Management4.2)Importance of cash management4.3)Cash planning and control4.4)Strategies use for cash management4.5)Short term investment opportunities

4.6)Managing cash outflow5. Cash Management in Manufacturing sectora) cash Shortage in India's Manufacturing Sector


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b) Issues involved in Cash Managementc)Impact of Cash Management in Manufacturing Sectord) Ways to keep hold of cash

6. Data analysis7. Recommendations8. Conclusion

9. Appendixa) Bibliographyb) Articlesc) Copy of questionnaire

CHAPTER:-1EXICUTIVE SUMMERY

EXICUTIVE SUMMERYCash is your business's lifeblood. Managed well, your company remains healthy and strong. Managed poorly, your company goes into cardiac arrest.If you haven't considered cash management an important issue, then you're probably undermining your business's short-term stability and its long-term survival.But how can you manage business cash better?To make a profit, most businesses have to produce and deliver goods or servicesto their customers before being paid. Unfortunately, no matter how profitable the contract, if a business don't have enough money to pay its staff and suppliersbefore receiving payment, the business will not succeed.To trade effectively and be able to grow sales and profits, a business needs tobuild up cash reserves by ensuring that the timing of cash movements creates anoverall positive cashflow situation.Bear in mind, however, that having a lot of cash in the bank does not necessarily make good business sense. Cash needs to be invested in the business in order to make the best return for the business owners.

CHAPTER:-2OBJECTIVES OF THE STUDY


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OBJECTIVES OF THE STUDY1. To know the importance of the cash management.2. To study the recent trends in cash management.3. To understand, and study how cash management is important for the long-term survival of the organization.4. Reinforces a culture of continuous learning.5. To understand the role of finance department in cash management.

CHAPTER:-3RESEARCH METHODOLOGY

RESEARCH METHODOLOGYResearch is the systematic process of collecting and analyzing information (data) in order to increase our understanding of the phenomenon about which we are concerned or interested.In simple words it is a purposeful investigation.Methods of gathering data:- postal questionnaire survey e-mail questionnaire survey Internet polls face-to-face interviews telephone interviews Systematic observation Text analysis Statistical data (secondary analysis)

Registered data


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CHAPTER:-4LIMITATIONS OF STUDY

LIMITATIONS OF STUDY

1. Time allotted for a project sometimes a big factor.2. The company doesnt disclose much information.3. Out-of-date information may offer little value especially for companiescompeting in fast changing markets.4. Cost - Compared to secondary research, primary data may be very expensive.

CHAPTER:-5LITERARURE REVIEW

LITERARURE REVIEW


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CASH MANAGEMENTMeaning:-Cash is money that is easily accessible either in the bank or in the business. It is not inventory, it is not accounts receivable, and it is not property. Thesemight be converted to cash at some point in time, but it takes cash on hand orin the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth does not always mean more cash.Profit is the amount of money you expect to make if all customers paid on time and if your expenses were spread out evenly over the time period being measured.However, it is not your day-to-day reality. Cash is what you must have to keep the doors of your business open. Over time, a company

s profits are of little value if they are not accompanied by positive net cash flow. You can

t spend profit

; you can only spend cash.Cash Flow refers to the flow of cash into and out of a business over a period oftime. The outflow of cash is measured by the money you pay every month to salaries, suppliers, and creditors. The inflows are the cash you receive from customers, lenders, and investors.Good cash management means: Knowing when, where, and how your cash needs will occur, Knowing what the best sources are for meeting additional cash needs; and, Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors.The starting point for avoiding a cash crisis is to develop a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly)

cash flow projections to help them manage daily cash, and long-term (annual, 3-5year) cash flow projections to help them develop the necessary capital strategyto meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went.

CASH MANAGEMENT CYCLE:-

CASH FLOW MANAGEMENTGood cash management is simple. It involves:1. Knowing when, where, and how your cash needs will occur2. Knowing the best sources for meeting additional cash needs3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditorsThe starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual,3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flowstatements to understand how they used money in the past.


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TYPES OF CASH FLOWS:-Positive Cash Flow

If the cash coming into the business is more than the cash going out of the busi

ness, the company has a positive cash flow. A positive cash flow is very good and the only concern here is managing the excess cash prudently.

Negative Cash Flow

If the cash going out of the business is more than the cash coming into the business, the company has a negative cash flow. A negative cash flow can be caused by a number of problems that result in a shortage of cash, such as too much or obsolete inventory, or poor collections on accounts receivable. If the company doesn

t have money in the bank or can

t borrow additional cash at this point, it may be in serious trouble.A Cash Flow Statement is typically divided into three components so that you c

an see and understand both the internal and external sources and uses of cash.

1. Operating Cash Flow (Internal)

Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It is the cash generated from sales of the product or service of your business. Because it is generated internally, it is underyour control.2. Investing Cash Flow (Internal)

Investing cash flow is generated internally from non-operating activities. This

component would include investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.3. Financing Cash Flow (External)

Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance ofstock and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

THE IMPORTANCE OF CASH MANAGEMENTBusiness analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.

Cash vs. Cash FlowCash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can

t be used to pay suppliers, rent, or employees.

Profit growth does not necessarily mean more cash on hand. Profit is the amountof money you expect to make over a given period of time, while cash is what youmust have on hand to keep your business running. Over time, a company

s profits


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are of little value if they are not accompanied by positive net cash flow. You can

t spend profit; you can only spend cash.Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for anybusiness. The outflow of cash includes those checks you write each month to paysalaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.

WHAT ARE THE COMPONENTS OF CASH FLOW?A "Cash Flow Statement" shows the sources and uses of cash and is typically divided into three components:Operating Cash Flow Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.Investing Cash Flow Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.Financing Cash Flow Financing cash flow is the cash to and from external sources

, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

Good Cash Flow Management?Good cash management is simple. It involves:1. Knowing when, where, and how your cash needs will occur2. Knowing the best sources for meeting additional cash needs

3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditorsThe starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual,3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flowstatements to understand how they used money in the past.Importance of Cash ManagementCash management consists of taking the necessary actions to maintain adequate levels of cash to meet operational and capital requirements and to obtain the maximum yield on short-term investments of pooled, idle cash. A good cash management program is a very significant component of the overall financial management ofa municipality. Such a program benefits the city or town by increasing non-taxrevenues, improving the control and superintendence of cash, increasing contacts with members of the financial community and lowering borrowing costs, while atthe same time maintaining the safety of the municipalitys funds.

THE GOALS OF CASH MANAGEMENTThe primary goals of a good cash management system are: To maintain adequate monies at hand to meet the daily cash requirementsof the municipality while maximizing the amount available for investment. To obtain the maximum earnings on invested funds while ensuring their safety.In order to reach these primary goals, a treasurer should strive to:

1. Develop strong, internal control of cash receipts and disbursements.2. Establish improved procedures for collecting outstanding taxes.3. Establish clear lines of communication between the treasurer and departm


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ent heads.4. Develop solid professional relationships with local bankers and other members of the investment community.

CASH MANAGEMENT SERVICES GENERALLY OFFEREDThe following is a list of services generally offered by banks and utilised by larger businesses and corporations: Account Reconcilement Services:Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understandwhich checks have not cleared and therefore what the company

s true balance is.To address this, banks have developed a system which allows companies to uploada list of all the checks that they issue on a daily basis, so that at the end of

the month the bank statement will show not only which checks have cleared, butalso which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known aspositive pay. Advanced Web Services:Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site.

Armored Car Services:Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the

cash. Automated Clearing House:services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized bysome consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise. Balance Reporting Services:Corporate clients who actively manage their cash balances usually subscribe tosecure web-based reporting of their account and transaction information at theirlead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as

float

(e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc. Cash Concentration Services:Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banksin the area. To prevent funds in these accounts from being idle and not earningsufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank

account.

Lockbox - Retail: services:


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Often companies (such as utilities) which receive a large number of payments viachecks in the mail have the bank set up a post office box for them, open theirmail, and deposit any checks found. This is referred to as a "lockbox" service. Lockbox - Wholesale:services are for companies with small numbers of payments, sometimes with detailed requirements for processing. This might be a company like a dentist

s officeor small manufacturing company.

Positive Pay:Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud. Reverse Positive Pay:Reverse positive pay is similar to positive pay, but the process is reversed, with the company, not the bank, maintaining the list of checks issued. When checksare presented for payment and clear through the Federal Reserve System, the Fed

eral Reserve prepares a file of the checks

account numbers, serial numbers, anddollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file to the company, where the company compares the information toits internal records. The company lets the bank know which checks match its internal information, and the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determinesif any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company

s files.

Sweep accounts:Are typically offered by the cash management division of a bank. Under this syst

em, excess funds from a company

s bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds. Zero Balance Accounting:Can be thought of as somewhat of a hack. Companies with large numbers of storesor locations can very often be confused if all those stores are depositing intoa single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. Tohelp correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company

s main bank account. Thisallows the company to look at individual statements for each store. U.S. banksare almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a singleaccount. Therefore, zero balance accounting is being used less frequently.

Wire Transfer:A wire transfer is an electronic transfer of funds. Wire transfers can be doneby a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The mes

sage also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call.


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Controlled Disbursement:This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amountof disbursements that will be charged to the customer

s account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote br

anch of a bank and customer is able to delay the payment due to increased floattime.

ELEMENTS OF AN EFFECTIVE CASH MANAGEMENT PROGRAMBank RelationsThe treasurer should strive to be constantly aware of the range of services available from area banks. Since banks service charges and investment rates vary,the treasurer should regularly evaluate the charges and rates of the banks usedby the municipality to make certain that continuing to utilize these banks best

serves the interests of the municipality. When selling bonds or notes, the treasurer should endeavor to receive a sufficient number of bids to ensure competitive rates for the borrowed funds. Whether borrowing or investing monies, the treasurer should solicit bids from at least 3 area banks.The treasurer should critically review bank statements for treasury checking accounts and should funnel all activity into one account when possible. Also, thetreasurer should utilize a uniform system of forms and procedures for all collection, deposit, and disbursement activities. (See Chapter 12, Procuring Banking Services, for more detailed information about banking relationships.)Cash Flow StatementsAs a component of implementing an effective cash management program, the treasurer must prepare a cash flow statement, also called a cash budget. Cash budgeting involves the estimation of cash receipts and cash disbursements to determine

cash availability. A treasurer can best identify the municipalitys major cashitems by examining an annual budget, payment and collection records and past cash flow patterns.Estimating Collection ReceiptsLocal taxes and state and federal grants constitute the primary sources of municipal funds. By reviewing a municipalitys treasury and accounting records, a treasurer can determine the pattern of receipts of that municipality. To assistin determining this pattern, the treasurer should develop a table that displays:(1) the type of each receipt, (2) the total amount of the receipt and (3) the month when each portion of the receipt was received. If the treasurer traces thecash flow back 2 or 3 years, a recognizable pattern should become apparent.The treasurer should assess the historical patterns of these cash flows in lightof current estimates and events. Although making adjustments for changing time environments is uncertain business, attempting to make such adjustments shouldimprove a collections forecast.Forecasting DisbursementsMunicipal payrolls account for approximately 70% of the expenditures of most cities and towns. These expenditures tend to be relatively constant; accordingly,they can be reliably predicted. A treasurer should use prior payroll records,together with the next fiscal years budget, to calculate the amount of the annual payroll.The gross payroll, however, is not the amount disbursed. Rather, the amount disbursed is the gross payroll amount less deductions for federal and state incometaxes and for fringe benefits, such as workers compensation and retirement. The payroll disbursement forecast should also include adjustments for seasonal or

temporary workers and for seasonal payments, such as vacation advances in the summer months. If a municipality offers a lump sum payment option for teachers, the payments are disbursed at the end of the school year.


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Disbursement of monies previously withheld for income taxes and for employee benefits constitutes a significant payment by a municipality. To forecast the amount of this disbursement for some discrete period, such as from July 1 through January 1, the treasurer must add all of the deductions from a weekly or biweeklypayroll and multiply the sum by the number of pay periods falling within the designated time period.As part of forecasting disbursements for personnel costs, the treasurer should a

ttempt to estimate the actual cash disbursement if that disbursement deviates from the budgeted or authorized amount. Budgeted amounts can change only with supplemental appropriations, while authorized amounts can change with the increase or decrease of actual employees.After completing the payroll disbursement forecast, the treasurer should developforecasts for other kinds of payments. The treasurer might begin by analyzingeach departmental budget for non-payroll items and then focusing on the more expensive items first. For each item, the treasurer should converse with the departmental officials familiar with expenditures to discover the pattern of past cash disbursements with respect to that item and the anticipated pattern and amount of expenditure for the item for the upcoming year.

Analyzing Cash Flow and Preparing a BudgetAt a minimum, a treasurer should prepare cash flow data on a monthly basis for the current year. In larger communities, the treasurer should compile cash flowinformation more frequently, on a daily, weekly, or biweekly basis, depending onthe size of the community.The treasurer should prepare cash flow summaries using two basic categories of inflows and outflows of cash, recurring and extraordinary. Recurring payments and receipts, such as payroll expenses and property taxes payments, can be anticipated regularly, month after month; extraordinary payments and receipts, on theother hand, result from nonrecurring programs or items, such as federal grants or capital expenditures.

The treasurer should use the history of major collections and disbursements forthe previous 3 to 5 years to identify recurring expense and disbursement patterns. The treasurer should then extrapolate these past trends into the future, being careful, at the same time, to make adjustments for anticipated changes in timing and payment patterns and to recognize when particular historical data is not representative.Analyzing the municipalitys current operating budget, looking particularly forthe percentage increase in payroll and in other expenditures, for changes in seasonal spending patterns and for adjustments caused by the addition or deletionof programs, will provide crucial information for preparing a cash flow analysis. Also, examining the capital budget and communicating with department headswill assist in making projections concerning special cash flow items. (See pg. 11-26 for a sample projection of the flow of receipts and disbursements relatedto special revenues and expenditures.) Of course, analyzing historical information is of little assistance in projecting special revenues and expenditures ina cash flow analysis.Because cash availability is the fundamental concern of cash management, some treasurers are very conservative in estimating receipts of funds and liberal in estimating disbursements when they prepare a cash budget. For instance, they might budget a receipt expected to be taken in at the end of a month as being received the following month. Certainly, it is better to err on the conservative side. Notwithstanding, accuracy is critical in estimating and managing a municipalitys cash.(See pg. 11-27 for a sample cash budget. In this sample, historical projectionsand estimates of special receipts and disbursements were adjusted, based on th

e treasurers knowledge of significant operational changes and unusual items.)


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SUGGESTIONS FOR IMPROVING CASH FLOWThe treasurer can maximize the amount of a municipalitys available cash by accelerating cash receipts. A treasurer can increase the available cash amount by: Making daily deposits. Using a lock box. Receiving wire transfers of state aid. Applying promptly for reimbursement of state/federal grants. Utilizing, direct deposits, Automated Clearing House payments, and otherelectronic means of transferring funds, whenever possible, making sure that theappropriate safeguards are in effect.The treasurer should induce municipal departments with large cash receipts to ma

ke deposits directly into an account specified by the treasurer, providing the treasurer with a written notice of each deposit, together with the deposit receipt provided by the bank. This practice will result not only in an earlier deposit of the funds, but also in a more accurate deposit record since the bank will check the accuracy of the deposit slip.The treasurer should ensure that checks for large amounts are deposited immediately. If, for example, a tax collector receives tax escrow payments from a mortgagee bank at a time when the collector is too busy to process them, the treasurer should instruct the collector to prepare a deposit slip and deposit the bank check immediately, retaining a duplicate copy of the deposit slip with the payment breakdown. In this way, the money will be available for investment right away, and the collector can process the payment information whenever convenient.The treasurer should urge the collector to make use of tax takings and other tax

payment enforcement remedies allowed by law to expedite the collection of unpaid taxes. The treasurer should actively proceed with tax foreclosures and with land of low value sales in accordance with the best interests of the municipality.The treasurer can also improve cash flow by working with department heads to schedule certain cash disbursements. For example, if a municipality has appropriated money to the public works department for the purchase of new trucks, the treasurer should encourage the department head to arrange for delivery of the trucks no earlier than late April, close to the due date of the 2nd semiannual tax payments or the 4th quarterly tax payments, when funds will be on hand to pay forthose trucks. Such planning minimizes the need for revenue anticipation borrowing.When possible, the treasurer should first pay bills that offer discounts, postponing the payments of other bills until the due date. Also, when market conditions permit, the treasurer should schedule the issuance of debt to make the payment due dates coincide with times when the communitys cash revenues are at theirmaximums. The treasurer should require all capital project managers to provideregular reports of project payment schedules, permitting the treasurer to obtain maximum earnings on project funds.

Effectively Investing Available CashObligates the treasurer to invest all monies not required for current operationsso as to receive the highest rate of return reasonably available taking into ac

count safety, liquidity and yield. To maximize interest income, the treasurer must determine how much money is available to invest by answering the followingquestions:


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How much cash is on hand? How much money is needed to meet weekly or monthly warrants? How much money will be deposited weekly or monthly?The treasurer should use the answers to these questions as a basis for planninginvestments. By maintaining a chart of deposit accounts, such as the bank ledger discussed in Chapter 3, adding the daily deposits to these accounts, and subtracting amounts transferred or paid on warrants, the treasurer can determine exa

ctly how much cash is available to invest. Furthermore, the cash flow budget will permit the treasurer to determine the length of time for which particular funds can remain in investments.The Yield CurveThe cost of money varies according to the length of time for which it is borrowed or loaned. Generally, longer time periods are deemed to have a greater risk associated with them and thus command higher interest rates. This phenomenon, ofcourse, favors a municipality when making long-term investments and disfavors the community when making long-term borrowings. Accordingly, treasurers should use cash flow budgets to design investments for the longest reasonable periods inorder to obtain the highest yields on these investments.Treasurers should attempt to be constantly aware of the various interest rates o

ffered by area banks. They should regularly communicate with these banks and ask to be on their mailing lists for publications about bank services and about interest rates on different types of investments over varying time periods. Treasurers should also visit the websites of area banks to review information aboutinterest rates and bank products.

PROBLEMS OF CASH MANAGEMENTA timing difference between cash in- and outflows poses challenges for the Department of the Treasury. Increased volatility of monthly cash flows may lead to unexpected short-term debt issuance and hence at the start of the month will diminish gradually in coming years, start-of month payments to Medicare plan sponsorsfor Medicare Advantage and Part D benefits are projected to grow. As requested,this report (1) describes how Treasury, the Centers for Medicare & Medicaid Services (CMS), and plan sponsors operate under the current payment schedule; (2) identifies timing options; and (3) describes potential implications for Treasury,CMS, and Medicare. GAO analyzed Treasury cash flows, and interviewed Treasury,CMS officials, and plan sponsor representatives.Treasury

s primary debt management goal is to finance the government

s borrowingneeds at the lowest cost over time. Issuing debt through regularly scheduled auctions lowers borrowing costs because investors and dealers are willing to pay apremium for liquidity and certainty of supply. In 2006 GAO reported that Treasury faced misalignment of cash flows, with large payments due at the start of themonth and large cash receipts occurring midmonth. This misalignment results inincreasing cash flow volatility. The volatility leads Treasury to carry higher average cash balances and issue short-term debt outside its regular schedule, which may raise overall interest costs. Payments to Medicare plan sponsors made atthe start of the month have increased the misalignment of cash flows. These payments have more than doubled between 2005 and 2007, and they are projected to con

tinue to grow. GAO developed several options for changing the timing of Medicareplan payments that would facilitate cash management, keep payments predictable,and treat all plans equally. The options include keeping a single payment but m


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aking it on a different date or making multiple payments each month. Treasury officials said that moving some or all of the Medicare payments away from the start of the month would greatly facilitate cash management. CMS expressed concernsabout potentially increased administrative burden. Plan sponsors GAO interviewedand CMS

s Office of the Actuary indicated that sponsors would generally seek torecoup any loss by raising their Medicare bids, thereby raising costs to the Medicare program and beneficiaries. The overall impact on the federal budget of ch

anging payment timing would depend on the relative size of interest cost reductions and plans

responses.

TYPES OF INVESTMENTSAn investment is a placement or commitment of money or capital in a way intendedto gain profit or interest, as by purchasing property, securities or bonds. Asnoted above, treasurers are compelled by Ch. 44 55B to invest all moniesnotrequired to be kept liquid for purposes of distributionin such a manner as to require the payment of interest on the money at the highest possible rate reasonably available, taking account of safety liquidity and yield. Liquidity is thequality of being readily convertible into cash without substantial transactioncosts. Security is the quality of assurance that the investment expectation will be fulfilled in a timely fashion. Yield is the measure of effective return onan investment, usually expressed as a percent.

Many communities maintain written investment policies that serve as a guidelinein making investments of short-term funds. These policies delineate investmentprocedures and considerations and define levels of acceptable risk. Frequently,the policies identify the financial institutions that have satisfied the communitys criteria for secure deposits. In addition, the policies generally includespecific information about delegation of authority, internal controls, ethics and conflict of interest.Ultimately, the standard to which a treasurer is held in making investments is the prudent person standard. A treasurer should always remember to weigh the risk of financial loss when making municipal investments. When investing a municipalitys money, the treasurer should carefully avoid high-risk or speculative investments, even if legally permitted.Identify the various institutions into which municipal funds may be deposited.A treasurer who deposits monies into these institutions will not be personally liable for any loss of money due to the failure of the institutions. Notwithstanding, a prudent treasurer must make certain that deposits and investments are sufficiently insured, adequately collateralized and invested in institutions that have been researched for stability and safety.The FDIC insures deposits in FDIC-insured institutions. All types of deposits received by insured institutions in their usual course of business are insured upto $100,000 per deposit, including savings deposits, checking deposits, deposits in NOW accounts and time deposits, including CDs. In the case of a bank failure, the FDIC insurance protects deposits that are payable in the U.S. The treasurer should communicate with the FDIC to determine whether separately named accounts are considered as separate deposits for the purposes of applying the $100,0

00 limit.In the past, a number of governmental entities incurred significant losses due to inadequately secured investments. In order to remedy this situation, the Gove


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rnmental Accounting Standards Board (GASB) issued Statement 3, which requires governmental entities to disclose their policies regarding securitization and safekeeping for deposits and investments, including repurchase agreements, better enabling investors to assess the degree of risk more accurately. These disclosures must inform potential investors about situations in which a greater credit risk exists during the investment period than on the balance sheet date.Cities and towns should disclose the amount of their total bank balances that ar

e: Insured or collateralized with securities held by the municipality or byan agent in the municipalitys name. Collateralized with securities held by their financial institutions or by an agent in the municipalitys name. Uncollateralized.The carrying amount and the market value of investments should also be disclosedfor each type of investment as of the balance sheet date. The disclosure should state the total amount of each type of investment and should categorize investments that are: Insured or registered or held by the municipality or its agent in the municipalitys name.

Uninsured or unregistered, with the securities held by the counterpartyin the municipalitys name. Uninsured or unregistered, with the securities held by the counterpartybut not in the municipalitys name.

Certificates of DepositA Certificates of Deposit, generally known as a CD, is a written acknowledgementby a commercial bank, savings and loan institution or mutual savings bank containing a promise to pay interest at a specified rate for a fixed period of timefor funds deposited in the institution. CDs provide a useful instrument for short-term investments, usually more than 7 days. They are available in almost any denomination, although most have a minimum amount. The bank pays interest on the certificates face value, and the interest accrues on a 360-day or 365-day

basis. Rates vary depending on the length of time for which the certificatesare issued, the amount of money deposited and the prevailing market rate. Ratesalso vary among banks, making it important for treasurers to obtain quotes froma number of banks before making a purchase.Because monies are deposited in a CD for a fixed term, the instrument is not considered a liquid investment. A bank can legally refuse to return the money before the maturity date. If a bank allows redemption before the maturity date, themunicipality must pay a substantial, early withdrawal penalty. Accordingly, atreasurer should only purchase a CD when it is very probable that the municipality will not have to spend the money during the CDs fixed term.On the other hand, if a municipality can afford to tie up money for fixed period, a CD provides an effective vehicle for obtaining fixed interest rates for thatperiod. Of course, timing the purchase of a CD is important since interest rates vary dramatically. The treasurer should strive to make the purchase when interest rates are high. The municipality will then continue to earn the high rateuntil the CDs maturity. On the other hand, if the treasurer purchases a CD when interest rates are low, the instrument will earn interest at the low rate.U.S. Treasury BillsTreasury bills are bearer obligations of the U.S. Government that are issued ona discount basis; that is, a purchaser buys the instruments at less than the face value and receives the face value upon redemption. The difference between the purchase price and the redemption price is the interest income. Treasury bills are backed by the full faith and credit of the U.S. Government and are considered the safest investment. Because of their relative safety and marketability, T-Bills, as they are called, generally provide lower yields than do comparable

short-term investments.Repurchase AgreementA repurchase agreement, also known as a repo or a buyback, is a contract tha


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t requires a seller of securities, most often treasury securities, to buy the investment back in the future at a designated time and price. An advantage of this investment vehicle is the flexibility of its maturity. A repo may be sold fora fixed period of time, on demand, or renewable on a day-to-day basis.The authority of a municipal treasurer to invest in repurchase agreements is setout in Ch. 44 55. This statute permits the treasurer to invest in obligations issued or unconditionally guaranteed by the United States government or any ag

ency thereof and having a maturity from date of purchase of one year or less, orin United States government securities or securities of United States government agencies purchased under an agreement with a trust company, national bank or banking company to repurchase at not less than the original purchase price of said securities on a fixed date, not to exceed ninety days.However, while repos offer flexibility in maturity dates, they are not without risk. In the past, some banks have used the same security for several, simultaneous repurchase agreements. Accordingly, when investing in a repo, the treasurershould make certain to take possession of the underlying security or to receivewritten notification of the transaction from a third-party trustee who holds the security on behalf of the municipality. In this way, the municipality will beprotected in the case of a bank default.

Money Market Deposit Accounts (MMDAs)A money market account is a savings account that shares some of the characteristics of a money market fund, a mutual fund that invests solely in short-term securities. These accounts, like other saving accounts, are insured by the Federalgovernment up to $100,000.Banks generally place restrictions on money market accounts. The restrictions usually include: A minimum daily balance requirement, with an interest rate reduction ifthe balance falls below this minimum. A limit on the number of withdrawals, such as 6 per month with a maximumof 3 checks. Under such a limit, a depositor could, for example, write 3 checks and make 3 withdrawal transfers in a month. Alternatively, the depositor might write 2 checks and make 4 withdrawal transfers and two checks, etc.

MMDA accounts provide an ideal investment vehicle to obtain moderate yields while keeping funds liquid. Every municipality should have at least one money market account. It is up to the treasurer to determine how much money should be kept in these accounts.Massachusetts Municipal Depository TrustAuthorizes the state treasurer to establish, with the advice of an investment advisory council, one or more combined investment funds and to sell participationunits to local governments. Under this authority, the state treasurer has established the Massachusetts Municipal Depository Trust (MMDT), a professionally managed investment pool. The trust manager invests in money market securities, such as CDs, T-Bills, repos and commercial papers. Participants purchase shares inthe pool by depositing funds. Under the rules and regulations adopted by the state treasurer, no minimums exist regarding either the amounts deposited or thelength of time monies may remain on deposit. Rates are subject to fluctuation and are not guaranteed. Monies deposited in the MMDT are liquid, i.e., they maybe accessed at any time.U.S. Government Agency ObligationsAgency obligations, also referred to as agency securities are debt instrumentsissued by government agencies to fund loans to particular groups of borrowers,such as students, farmers and homebuyers. Agency obligations include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Bank System (FHLB), the Federal Farm Credit Bank (FFCB), and the Student Loan Marketing Association (Sallie Mae.Agency obligations generally yield high credit ratings because of their association with the federal government; however, they are not government obligations ba

cked by the full faith and credit of the U.S. Government. Accordingly, agency obligations are slightly riskier than Treasuries, but they also have the potential for higher earnings.


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Secondary MarketsPrimary markets allow investors to bid directly for the purchase of securities with issuers and, as a result, tend to provide more favorable prices. Secondary

markets permit investors to purchase securities at other times than their issuance dates or to sell securities prior to their maturity dates.General economic conditions affect interest rates, which in turn determine the market behavior of securities in both primary and secondary markets. Confidencein a particular security can also affect its behavior. Confidence is determined by an investors perception of the financial health of an institution or the collateral behind a security. It tends to be most important in determining the strength and activity of a security in the secondary market. For instance, Treasury Bills are always very active in both primary and secondary markets because they are backed by the U.S. Government. Understanding how markets behave undera variety of conditions and gaining a feel for how various securities will be affected is a skill acquired through day-to-day experience, as well as by a study

of the characteristics of securities.Mutual Fund Money Market AccountsPermits municipalities to invest in money market funds managed by mutual fund companies. The underlying securities of the funds must be within the guidelines approved by the Commonwealth, similar to securities that would appear on the legal list of investments. The statute limits investment to those money market funds that have received the highest possible rating from at least one nationallyrecognized statistical rating organization.

Investment-Related MattersMunicipalities borrow for a variety of reasons, such as to fund temporary cash needs and to finance the construction of public works. The investment of borrowed funds is heavily regulated by federal arbitrage laws. Accordingly, the treasu

rer should work closely with bond counsel to determine the status of existing and proposed federal laws and regulations relating to arbitrage before the municipality effects a borrowing.A useful resource for treasurers is a Time Teller Calendar that computes at aglance interest, elapsed time and maturity dates on notes. Some banks will provide this resource to treasurers. For each day of the year, the calendar exhibits the number of days from that day to any other day in the next nine months.Every treasurer should keep records of all investments. While the treasurer can design the forms to use for this process, these forms must make it possible to record all the necessary information to provide an accurate picture of each transaction. The Investment Register on pg. 11-31 displays an example form that can be used to record investment transactions made in person, by mail, or over the telephone. Of course, a telephone transaction should be confirmed in writingas soon as possible.A treasurer must observe the limitations on deposits in any one bank, This statute specifies that a municipality may not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of thatinstitution and that the total of all the municipalitys accounts may not exceed 60% of the banks net equity If a treasurer wishes to exceed this limit, the bank must pledge additional securities to cover the extra amount deposited. Treasurers should retain these securities in their custody. Banks will make available copies of their most recent Statement of Condition from which a treasurercan determine the banks capital and surplus amounts.absolves treasurers of any personal liability if they, in good faith and in theexercise of due care, deposit public money in the MMDT or in a Massachusetts-or

ganized savings bank, trust company or FDIC banking company and a loss results from the closing up of the depository or from the liquidation of its affairs. This statute does not, however, absolve from liability a treasurer who invests pu


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blic funds in a non-FDIC bank outside of Massachusetts.

CASH MANAGEMENT PLANMoney is the most important tool in any successful business, and making sure youhave it when you need it should be a top priority. This requires creating and implementing a cash management plan.Many business owners in our industry, even some who are extremely knowledgeableabout decorating and efficient production management, have no idea what an income statement is. They get by running their business with "checkbook accounting" ?which can lead to disaster.

A cash management plan deals with five areas: receipts, expenses,profits, getting paid and back in black.

1. Cash receipts

Cash receipts are the available dollars in your company checking account. This is not the same as what you bill your customers. It

s important to distinguish between cash flow and sales. Cash flow is the money you actually have in hand; itdoes not include outstanding or uncollected sales dollars.

If your business has a history, your first step is to review your cash receiptsfor a specific time period, e.g., a

day, week, month, quarter or year. (Looking at several periods provides micro and macro perspectives.)

Say, for example, a hypothetical business has cash receipts of $1.2 million a year. That averages out to $100,000 a month, $25,000 a week and $5,000 a day (using the common reference frame of 4.33 weeks in a month and, allowing for holidays, 20 workdays in a month). Of course, these are averages; actual cash flows in peaks and valleys.

Plug these averages into the profit cycle and that means sales has to generate $5,000 per day. But we are not talking about just sales here; we

re talking aboutcash flow. Next we need to look at the profit on that $5,000 a day. A sale minus the cost of goods equals gross income. Gross income minus expenses equals netincome.

2. CALCULATING EXPENSES

Expenses are all the things that are necessary to keep your doors open. In addition to production costs, they include rent, utilities and indirect labor, such as the person answering the phone. I also believe in factoring profit, or ROI (return on investment), into a cash management plan as an expense. If you don

t plan for profit the same way you do for your electric bill, it

s not going to happen.

Expenses are expressed as a percentage of gross sales. For example, if you sell

a sweat shirt for $20, that is your gross sale. What you have left after subtracting the cost of the shirt? let

s say, $10?and all of your other expenses, and profit? is your net income.


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What we are talking about here is EBIDTA: Earnings Before Income Taxes, Depreciation and Amortization. EBIDTA is a cash management tool to help ensure a business makes progress. Most people don

t understand how depreciation, amortization and interest affect profitability.

Looking at their businesses from a tax-planning standpoint, many owners want to

keep their income down by showing a net loss. Therefore, they write off as muchas possible ? they drive cars leased to their company or use a company-paid cellphone, etc. Bear in mind that this strategy ? by reducing profitability ? alsomakes the business significantly less appealing to prospective buyers when the time comes to sell.

3. PLAN FOR PROFITS

Before you can plan for tax advantages, you

ve got to plan for profitability. Tocome up with a realistic profit percentage, begin by reviewing industry operating ratios available from SGIA, the Specialty Graphic Imaging Association (www.sgia.org). Your banker, or business library, will have national operating ratio in

formation compiled by The Risk Management Association. (RMA, formerly The RobertMorris Associates, is a national association of commercial bankers, and it sells its reports at www.rmahq.org). These ratios are based on statistics compiled from large numbers of businesses and are expressed as a percentage of gross sales.

I plan for an 18% profit. For our hypothetical $1.2 million business, that profit ratio would work out to $96,000 a year.

Part of creating your general business plan is determining which products you are going to sell. Products and services differ in their profit margins. For instance, the margin on custom decorating is typically higher than margins on contract decorating or wholesaling. Cash flow management involves factoring in the prof

it margin of various types of products and services whendeveloping your product mix.

If we apply the example of a 50% cost of goods, 30% expenses and 20% profit to our $100,000-a-month business, that means we

re going to spend $50,000 a month onproducts and $30,000 in expenses. And we should ? if we

ve done everything right ? have $20,000 in profit. Profit can be reinvested in the business by retiringdebt, expanding your facility and buying new equipment.4. GETTING PAIDIn order for a cash management plan to function, you

ve got to get paid. One strategy I use is to require a 50% deposit from customers. Some people are uncomfortable discussing money. However, if you don

t ask, you won

t get it. You must have a procedure in place that requires asking for and getting that deposit.We will sometimes accept a purchase order in lieu of a deposit when we

re certain the customer is authorized to place the order. We also offer some of our clients incentives to pay at the time they place an order, offering free freight or an extra five shirts for every 50 paid.

All customers who have not paid in advance are presented with a balance due invoice when they pick up their goods. Credit-worthy accounts get net-10 day terms (though we actually tolerate net-30 days for reliable customers who insist on that); all others are expected to pay in full.

5. BACK IN BLACKWith a cash management plan in place, you will have the cash you need to pay you

r bills and keep your business in the black. Without a cash management plan, many businesses find themselves robbing Peter to pay Paul and before long, they areout of business. If you do not already have a plan in place, the sooner you can


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accomplish this, the sooner you can be assured that your business is on solid ground and will stay there.

CASH MANAGEMENT STRATEGY1. ForewordThe PCT has a duty to remain within its Cash Limit, and cannot drawdown cash beyond that. Therefore, cash must be managed efficiently toensure that the PCT has adequate cash for its needs for the whole year.In the future any loaned funds from the Department of Health (DOH) willincur a charge. This will put additional pressure on the PCT resource limit anda detailed plan for repayment of the loan will be required.Ineffective draw down of cash throughout the year is uneconomical for the Treasu

ry, and where the DOH deem a PCT is at fault the DOH can impose a penalty on that PCT. Cash management cannot be undertaken in isolation from resource management. Both need to be planned and managed throughout the year.There are Treasury rules that apply to the total cash available to the DOH. TheDOH cannot draw more cash from Treasury than the financing requirement approvedby Parliament. The PCT should not draw down cash in advance of need for any month. Any cash drawn down for contingencies results in a penalty charge from Treasury (i.e. supplementary cash requests), these penalties could bepassed on to the PCT.2. Calculation of total cash available to the PCT1. Total cash available to the PCT equals Net resources as per approved resource allocation estimates for the current financial year

Plus capital allocation for the current financial year Plus or minus any cash loans or repayments Less non cash items (new provisions, capital charges, depreciation, andimpairments) for the current financial year Forecast decrease in creditors or forecast increase in debtors for the current financial year Plus payment of provisions (when the provision crystallises) as a due payment. Less actual cash balances at the 31st March from the previous financialyear

Parliament votes cash for one year only. Any cash in the PCT bankaccounts at year end is not available to support the next years cashpayments. Cash balances reported in Annual Accounts can be deductedfrom the PCT in the next year. Therefore, it is essential that cashbalances are reduced to zero at year end.

3. HM Treasury cash flow controlsTreasury has to manage its cash requirements and borrowing in eachmonth. To do this cost effectively requires all parts of the Exchequer toforecast cash needs for each month in advance of the start of the month.Poor cash forecasts for the month as a whole result in higher borrowingcosts. Treasury measures performance and passes on higher coststhrough penalties.

The PCT must forecast its cash requirements for the following month and notify the DOH by deadline agreed (usually 22nd of the month).


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Drawing too much cash which results in high month end balances can also result in penalties. Drawing too little cash will may mean that the PCT is unable to meet its payment policy target.

Currently, Treasury cash penalties are managed centrally by the DOH;however, they have always maintained that these penalties will be passed on if N

HS organisations do not become more efficient and economical in their use of cash..4. Cash requisitioning Cash requirements should be linked to annual planned cash flow The PCT should make as accurate as possible its forecast of net cash requirements for the following month. This requirement is needed for both discretionary and non discretionary services. Contingencies should not be built into forecasts as this will increase Treasury borrowing costs and could incur penalties. In month supplementary requisitions should only be used for unplanned events (currently under review by the DoH).

Requisitions for discretionary and non discretionary accounts should beseparate Cash for non discretionary accounts should not be used for discretionarypayments The PCT should not requisition contingency sums to non discretionary accounts.

5.Bank accounts All settlements between NHS bodies or other OPG users should be made viaRFT transfers. Separate OPG accounts will be held for discretionary and non discretionary cash. The same level of management is required for non discretionary accounts

as for discretionary Where discretionary payments are made from non discretionary accounts they should be funded by transfer from discretionary accounts on the same day. Cash in non discretionary accounts should not be loaned to the discretionary account. The PCT also holds separate OPG accounts for Charitable Funds and Patients Monies. There must not be any cash loans between accounts. Transfers will occur between the Discretionary OPG account and the Charitable Funds OPG account for any services or goods purchased via the PCT main ordering and payment system. Likewise cash paid into the wrong OPG account inadvertently will need to be transferred to the correct account. Monthly reconciliations by the Shared Services Agency will ensure any transfers are made on a timely basis. Transfers will also occur between the Discretionary OPG account and thePatients Monies Account. This will be in respect of monies held in safekeeping for long term clients as it is an interest bearing account.

6. Clearing House Automated Payments System (CHAPS) CHAPS involve high value same day transactions which are costly to Treasury in managing cash flows. Special penalties apply. It should notbe necessary for the PCT to have to action CHAPs when BACS can be operated through OPG accounts direct and all payments to NHS trusts and other government departments can bemade via OPG RFT1 transfers Transfers via CHAPS should be the exception and will carry a charge. Quarterly FIMS returns monitor the use of CHAPs payments.

7.Cash Management Standards


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1. Billing and payment within the NHSa) Commissioned services (including education, training and R&D) All service agreements (SLAs) above 250k in annual value should be subject to monthly billing by the first of the month to which the bill relates, andpayment on the 15th of the month (or the previous working day) with the exception of JPH which is paid on the 1st of the month. These bills should exclude variations in value arising from risk share a

rrangements within SLAs, which should be billed no less frequently than quarterly, within 30 days of the quarter end, and paid on the 15th of the month following receipt of the bill. Any disputed amounts should be credited by the trust on the next quarterly account, and re-invoiced when agreement is reached. In the event of failure to reach agreement on a dispute within three months of issue of an original billover 50,000, the billing trust should seek conciliation from the SHA. Lower amounts should be resolved between Directors of Finance within four months. In the event of conciliation failing to secure resolution within two months of commencement of the conciliation process, the SHA will make a ruling, which will be binding on both parties. As a consequence the PCT should not be holding an NHS debtor or creditor which is over six months old.

For SLAs under 250k in annual value, quarterly billing and payment willoperate. Bills will be issued at the beginning of the quarter and paid on the 15th of the second month in the quarter. If the deminimus limit of 250k too high, and if a more frequent paymentarrangement for low value SLAs is required, this can be built into SLAs.

b) Provider servicesThe same billing and payment rules will apply to service level agreements for provider services as for commissioned services.

c) Failure to reach agreement on service agreement valuesWhere agreement has not been reached on service agreement values by 1st April, bills for April will be based on the preceding March bill (excluding risk share c

harges). Conciliation should be sought by the PCT from the SHA, and a two monthlimit on a conciliation outcome set, following which a ruling will be made by the SHA which is binding on both parties.Billing will continue as for April untileither conciliation is concluded or the SHA ruling is issued. Any adjusting bills will be issued within 30 days of the ruling and paid on the 15th of the monthfollowing the month of issue. In all matters of conciliation it is the SHA of the lead PCT commissioners that leads and determines any final ruling, following consultation with the providing trusts SHA Contracts with foundation trusts (FT)must be explicit about payment arrangements and it is proposed that these contracts follow the best practice described above. FT contracts are legally bindingand interest on late payment should apply as for commercial businesses.

d) Advance payments of billsAdvance payments of non NHS accounts are governed by Treasury guidance and suchpayments may only be made if it can be demonstrated that the cost to the publicpurse as a whole is lower than if paid on the usual due date.

e) Lead commissioner arrangementsWhere there are lead commissioning arrangements, and it has been locally decid

ed that the lead PCT pays the provider trust on behalf of other PCTs, the lead PCT must bill the other PCTs before the 15th of the month for payments made on their behalf. The other PCTs must settle these accounts by the 25th of the same month (or nearest working day), subject to invoice being received in time to enable payment.

8. Monitoring of performance on billing and payments.The PCT is required to conform to the Better Payments Practice Codeand as such should pay at least 95% of its invoices within 30 days of


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receipt of valid invoice or receipt of goods. Historically the predecessorPCTs have not achieved this. Prompt payment will assist the PCT inmanaging its cashflow. The quarterly FIMS return monitors thepercentage of payments to both NHS and Non NHS creditors.Performance data on the Better Payments Practice Code will also bereported in the monthly Finance Report to the Board.

It is also important to ensure billing is done on a timely and accurate bas

is.The management accounts team is responsible for ensuring that invoices are raised on a timely basis for regular income. Prompt invoicing will assist in the management of cashflow.

Regular monitoring of NHS debtors and creditors should also beestablished. This will ensure any potential disputes are highlighted at anearly stage for resolution. All debtors/creditors over six months old and over 5,000 should be reported routinely to the Audit Committee or Finance & Performance Committee with explanations/action plans.

9. Monitoring of cash managementThe quarterly FIMS return monitors the cash management plans of thePCT and includes

1. Details of the PCT Cash Limit2. Reconciliation of Cash Drawings to Net Parliamentary Funding3. YTD cash flow against plan4. Details of cash drawings, net payments and opening and closing5. OPG balances6. Cash top slices by the DOH for PPA and Dental Contracts7. Balance sheet movementsThe PCT Cash flow forecast is included as part of the Finance Report that goesto the Board and Finance & Performance Committee.

The PCT mechanism of monitoring cash flow will include Monthly reconciliationbetween Income & Expenditure movements, Balance Sheet movements and Cash utilisation. Monthly review of outstanding creditors and debtors

Daily updating of cash flow spreadsheet Daily monitoring of Periodic Payments Register Identifying capital cash flow

DEVELOPING A TOTAL CASH MANAGEMENT STRATEGYGood cash management practices drive performance through all stages of the business cycle. Nevertheless, in the good times these practices can become lax, leaving businesses vulnerable when conditions deteriorate.Arguably, the current Global Financial Crisis is proving the most serious business setback since the Great Depression of the 1930s. It threatens to cut deeper and last longer than any other post World War II downturn. Certainly the implosion of banking systems around the world and the near paralysis of international and domestic debt markets have no real parallel in modern times.No one knows how recent economic and financial events will play out, just as theoptimal government policy responses remain unclear. Official forecasts on the end of the downturn are often conflicting and provide little clarity.Unlike governments and central bankers, which have to rely on financial aggregates and economic indicators that are to some extent always out of date, businessenterprises can base their decisions on close to real-time data. Obviously, companies must ensure that their information and reporting systems are producing data that is relevant, accurate and up to date. They must then use this informationto make prompt decisions.Some of the most important of these decisions are likely to concern cash management and liquidity matters, particularly the role that well developed cash flow f

orecasting and reporting practice can have in building and maintaining trust with key stakeholders and financiers. A failure to deliver this key information isa significant risk in the current environment.


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Cash is the lifeblood of every business. A business can generate an accounting profit, but without sufficient cash flow it cannot survive. In a period of extreme uncertainty, cash management has to be a management priority - one that stretches all the way to the CEO

s desk. Yet in practice, cash shortages often creep up on businesses, even large, apparently well-managed ones. Cash flow and workingcapital problems often reflect broader decision-making and management issues: cash forecasting and budgeting that is poorly executed, or non-existent

outgoings that have not been brought into line with reduced revenues credit lines that have not been locked in actions taken that crystallise unplanned-for cash outgoings (e.g. employee terminaion payments or tax obligations) stocks that are excessive and debtor balances that are out of control financing structures that are inefficient and weak excessively complex business structures and processes that absorb cash unnecessarily capital spending programs that have not been reviewed and revised to reflect current conditions.

The importance of cash management in business survival and stability was underlined a year ago when KPMG surveyed 152 executives from mid-sized organisations around the Asia Pacific region about their cash management practices. We wanted tounderstand the importance these companies placed on cash, how they were executing their cash management practices and how they were reacting to the changing financial climate.The study found that nearly three quarters of respondents regarded cash management as of great or vital importance to their respective organizations. Sixty-one percent reported they had introduced a working capital improvement program in the previous 12 months. A large majority of these said they had achieved an improvement in working capital of 10 percent or more. Cash released by these programs had been used to expand operations (72 percent), repay debt (39 percent), or

increase shareholder dividends (38 percent). Apart from reducing their workingcapital requirements, 31 percent of respondents planned to unlock cash from fixed assets.Obviously this survey took place before the worst of the global credit crunch and the associated economic downturn had been felt, although credit had already begun to tighten. It is certain that most of these companies would have become even more cash conscious over the following 12 months.A similar study conducted by KPMG in the United States and Europe during 2008 indicated that companies in these regions had become somewhat more nervous about deteriorating financial conditions than their Asian counterparts. This concern was reflected in their cash management practices. Particular issues reported by USand European companies included: suppliers demanding earlier payment customers delaying payments stakeholders seeking improved cash generation credit reducing in availability and increasing in cost.What both these surveys suggest is that there appears to be a positive link between the efficacy of cash management policies and practices and the profitabilityof companies and their overall business performance. Interestingly, companies with very accurate cash flow forecasts appear to be significantly more profitablethan those with poor cash forecasting records. Perhaps accurate cash flow forecasting is symptomatic of accurate and realistic business forecasting generally.KPMG

s Restructuring practice recommends to its clients that they embrace a

total cash management

philosophy. It means putting cash management at the centre of both business strategy development and operational decision making. There are

several elements in this process.1. Put cash at the heart of strategy developmentCompanies often perceive cash management as a relatively narrow, back-office res


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ponsibility concerned with stretching payment terms and chasing debtors. That isa mistake. Instead, it should be about obtaining greater visibility and controlof cash flows across the business. It is critical that management understands how cash flows through the enterprise, where it gets stuck and why, and what canbe done about it. This includes recognising that some arrangements can be tax effective, but not cash flow effective.2. Build a

cash culture

Instilling a

cash-conscious

culture is integral to maintaining a steady focuson cash. Employing a cash focus at the top and communicating it throughout the organisation is fundamental. By linking KPIs and incentive regimes to cash, executives can be measured not only on sales and margin but on ensuring that credit risks are assessed and debtors are collected on a timely basis.3. Improve forecastingCash flow forecasting needs to be accurate as well as realistic in its assumptions. Accurate forecasting should be based on a range of scenarios and risks so the organisation has an understanding of the key drivers on the cash position. Clear reporting lines are critical, and underlying assumptions should be regularlyreviewed and challenged. Poor forecasting typically results from inadequate technical skills and a lack of commitment to the task by managers. Many executives w

rongly combine cash flow issues with profitability and balance sheet concerns.4. Consider sensitivities and vulnerabilitiesDifficult economic times may reduce customer demand and impact the viability ofkey suppliers and the pricing of inputs. The first step in managing these risksis an assessment of key cash flow sensitivities. Scenario planning will help identify business vulnerabilities and core cash needs, both short and long term. Itwill also clarify any need for urgent change.5. Reconsider capital expendituresChanging business conditions should prompt a rigorous review of capital investment plans, especially those that will require ongoing funding from cash flows. Projects that are already seriously over budget and behind time should receive special scrutiny history suggests they often become cash

black holes

and fail to deliver some (or all) of their promised benefits.

6. Pick the low-hanging fruitFew reasonably large and complex organisations have exhausted their opportunities to generate extra cash, conserve it and reduce working capital requirements. Offering appropriate incentives is one way to uncover these opportunities. Thereare many of them. Here are a few examples.7. Improve the management of trade debtors Poor debtor management typically results from weak credit and collection policies. Debtor collections can be improved by the timeliness and accuracy of invoices. (It is surprising how many companies persist in sending out invoices that arevague, ambiguous or obscure in describing the goods and services for which payment is being sought.) Now is the time to focus on overall effectiveness of the credit team rather than merely associated costs.

8. Dispose of obsolete stock This process may result in an accounting loss, but can generate real dollars andpossibly crystallise a tax benefit.9. Review trade credit arrangements It is sensible to consider whether trade credit terms are being appropriately utilised and take full advantage of availability of trade credit. Where an opportunity exists to renegotiate terms to overcome a shortage in short-term cash flow,the early engagement of key creditors is vital.10. Identify non-essential purchases Even businesses facing a liquidity crisis are often found to be buying things t

hey do not really need. There is no substitute for a meticulous, line-by-line examination of input costs and overheads. Always ask what would really happen if this expenditure were reduced or eliminated altogether? Sometimes the answer is n


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othing at all.11. Undertake a similar review of the balance sheet Many well-established businesses possess surplus assets. Keep an eye open for

asset hoarders

. Remember to review the cash position of any partly-owned subsidiaries, associated companies, or joint ventures.Although the

great recession

may not feel like a blessing for companies, it ca

n be an opportunity to push through changes in how the company manages its cashflows.A short-term cash focus can yield a rapid payback (and potentially pay for longer term initiatives). However achieving sustainable, long-term improvements in cash management requires that it become ingrained and a natural part of everyday life for everyone in the business. Just as most people are used to considering the profit and sales implications of their business decisions, so too they shouldtake account of the cash flow implications. Targets, reporting and incentives will all have their cash flow and working capital dimensions. However this requires visible commitment and strong enduring leadership from the top.Winning companies should release cash from their businesses to give them financial flexibility and use the opportunity to embed effective cash management into t

he corporate culture and maintain a healthy balance between cash and earnings when prosperity returns.SHORT TERM INVESTMENTSWhich Are Best?If you need to make money quickly, consider short term investments. Short term investments allow you to invest an amount of money at a high yield interest rate,and gain access to the return sooner rather than later.There are several short term investment options out there, and the key to makingmoney successfully is finding the best short term investments. And that startswith learning the answer to the question you probably have: what are short terminvestments?Defining Short Term InvestmentsA short tern investment fund is a fund that earns you a return on your money in

a short period of time, such as one to ten years. This is different than retirement investing, and it can be a challenge to find short team, high yield investments. Good short term investments will have a high interest rate, allowing you toearn substantial money immediately.The Need for Short Term InvestmentsYou might need short term investments if you have a pressing need coming up in the near future. If, for example, you might need to have a down payment for a house or car in a year or two, you could make use out of short term investment options. Also, you might use this type of fund in replacement of a traditional savings account, because you will earn a higher rate of return. Some even choose to use short term investment funds to supplement their retirement income.How to Use Short Term InvestmentsIf you are interested in short term investments, talk to your financial advisor.He or she can tell you what the best short term investment opportunity you canuse will be. Then, invest your money, and leave it alone. Allow it to gain interest for the course of the investment period. When the fund comes to term, you will have earned interest on the money you invested.

Decide what amount of your total income you are willing to invest in your fund.Most people are comfortable with investing around ten percent of their total income. Then, choose the investment to use. It is best to take the amount and invest it into one particular investment. Your long term investments are where diversification is helpful.short-term investment plans!The stock market is pretty volatile right now, financial analysts don

t really r

ecommend real estate and gold prices are on a high. In such a situation where should the retail investor park his money.Let us consider the following examples:


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P F Mani is a 50-year-old executive working in a multinational firm. He has recently received a bonus of Rs 500,000 which he plans to use for his daughter

s wedding next year. So where should Mani invest his money?Typically, for risk-averse investors like Mani, most financial planners recommend safe investment options such as PPF, NSC, Kisan Vikas Patras, etc.However, all these instruments have long lock-in periods in excess of one year and, therefore, cannot be considered in the short run.

"Since he is a low-risk investor we will advice him to invest at least 70 per cent of his portfolio in liquid funds," says Abhilash Maheshwari of SureFin Investments, a Gurgaon-based portfolio management service company.Liquid funds are currently giving annualised returns of 4.5 per cent to 4.75 percent. They are better than bank fixed deposits as there is more liquidity. In case of a bank FD, you lose some interest if you break it before maturity. Also,liquid funds are more tax-efficient."We recommend the dividend option to taxpayers in the 20 per cent-plus tax category as here they would only lose 12.5 per cent as dividend tax," says Sanjiv Bajaj [ Images ] of Bajaj Capital.Agrees Rohit Sarin of Client Associates, "If the money is definitely required after one year then we would advise all investors to invest in debt only as 12 mon

ths is too short a period for equity investing even for a high risk investor."SureFin

s Maheshwari feels Mani should put the remaining 30 per cent in Fixed Maturity Plans of mutual funds. These are close-ended debt funds where the maturity of the underlying securities coincides with the maturity of the plan.Hence the yield of the security becomes the return to the investor at the end ofthe plan period. A one-year FMP is currently giving annualised returns of between 5.5 per cent to 6 per cent.However, there is limited liquidity in case of FMPs as withdrawal before maturity results in a 2 per cent to 3 per cent penalty. Bajaj recommends the dividend option of FMPs as the first choice in short-term investments for individuals in the high tax category.But should Mani put his money in these instruments and then forget about it forthe next one year?

"We would like to move the funds from liquid to arbitrage opportunities in bothequity and commodity derivatives markets to increase the effective return to theclient from 4.5 per cent (being earned in liquid funds) to say 8 per cent," says Surefin

s Maheshwari."These arbitrage opportunities are few and infrequent but when the opportunity arises we would definitely like to take advantage of the same," says Maheshwari.Arbitrage is the simultaneous purchase and selling of a security or commodity inorder to profit from a differential in the price. This usually takes place on different exchanges or marketplaces and is also known as a riskless profit.Bajaj also recommends the post office savings bank one-year time deposit schemethat offers a return of 6.25 per cent."Although the returns are taxable they are still pretty high and 100 per cent safe," says Bajaj. He feels one can also look at bank fixed deposits in the shortrun."Near the end of the quarter, to make up their deposit targets, banks start offering better returns. You may get a good deal," says Bajaj.In the second example, let

s suppose that Mani decides to use the bonus for a world cruise next year. Where should he park his money in the short run?"Mani is now an average-risk investor and, therefore, we would recommend his putting only 30 per cent to 40 per cent in liquid funds, which will subsequently beused to capture arbitrage opportunities in the derivatives market and the remaining in direct stock holding in such stocks which we consider value buys," saysSureFin

s Maheshwari.SureFin constantly researches stocks that are value rich but their true value isnot reflected in their stock prices as they are not current market favourites.

These they consider value stocks."These stocks realise their true value in a time span of not less than six months, i.e. whenever an unlocking event takes place. It includes investing in specia


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l situations like mergers, restructuring, and other value unleashing events," says SureFin

s Maheshwari.

MANAGING CASH OUTFLOW

Cash Flow Planning

One of the objectives of cash flow management is to hold the right amount of cash. If we hold too much cash, we lose the opportunity to earn a return on idle cash. If we hold too little cash, we run t

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