Cash Flow Forecasting

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Cash Flow Forecasting

• Objectives
• Upon completion of this session, the participant
  should be able to do the following
• Discuss the benefits of using a cash flow
  forecast
• Understand the various tools and information
  needed to prepare a cash flow forecast
• Prepare a simple cash flow forecast

Presented by Susan Anderson TexasTERM, Local
Government Investment Pool
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Benefits of Cash Flow Forecast

• Ensures liquidity
• Enhances cash management practices
• Forecasts problems
• Revenues not being collected properly
• Expenditures exceed budget
• Increase investment income
• Amounts available for investment
• Period of time to hold the investment

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Average Maturity

• The average maturity of the portfolio is arguably
  the single greatest determinant of investment
  performance
• Yield enhancement is accomplished primarily by
• extending maturities
• increasing credit risk
• reducing liquidity

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Risk/Return Analysis
Source Bloomberg - Merrill Lynch Indices
Should public funds take on more risk than this?
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Identifying the Cash
Cash Inflows
Concentration
Cash Outflows
Taxes
Employees
Fees
Bond Holders
Subsidies
Vendors
Inv. Income
Schools
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The Traditional Micro Approach

• Identify Cash Flow Components
• Identify Data Sources
• Determine Degree of Certainty/Predictability
• Develop Cash Flow Forecast
• Timing of revenues
• Timing of large expenditures
• Net change in fund balance during fiscal year
• Compare Forecast to Actual Results

This approach can be difficult to implement
because complete information about cash flow
components is often not available.
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Macro-Level Approach The Theory

• Identify an optimal allocation of Funds
• Funds that need to remain short-term for upcoming
  disbursements
• Balance that could be invested longer-term
  (core balance)
• Management of short-term funds based on
  micro-level cash flow analysis
• Management of longer-term funds based on market
  conditions

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Macro-Level Approach The Process

• Review historical cash balances (typically
  monthly data for 3-5 years)
• Determine if there are any statistically
  significant seasonal changes in monthly balances
• Identify any growth trends
• Project future balances

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Step 1 Review Historic Balances
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Step 2 Compute Seasonal Factors

• Quantify average size of monthly balance compared
  to overall historical average
• Identify historical peaks and low points in
  balances

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Step 3 Compute Growth
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Step 4 Identify Core Portfolio

• Identify funds needed to meet ongoing expenses
  (Short-term Portfolio) versus funds not
  expected to be spent (Core Portfolio)

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Step 5 Forecast Balances
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Using Cash Flow to Structure Portfolio

• Short-Term Portfolio
• Provide liquidity for short-term cash needs
• Money market funds and short-term investments -
  Examples
• State Pool/LGIP
• Overnight Repurchase Agreements
• Bank/Time Deposits
• Certificates of Deposit
• Intermediate Portfolio
• Ladder
• Core Portfolio or Reserve
• Funds not expected to be spent
• Can be invested in longer-term securities

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Constructing The Model Excel Spreadsheets
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Setting Core Balance Targets
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Calculate Liquidity Base
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