Lecture 11: School Business Administration and Cash Management

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Lecture 11 School Business Administration and
Cash Management

• EDA 757/PPA 730
• Fall 2002

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Lecture 11 Outline

• Roles of school business administrator
• Cash management
• Cash flow analysis
• ST borrowing
• ST investments
• Improving cash flow
• Accountability for cash

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School Business Administrator (School Business
Official)

• Serves as business manager of the district.
• Handles most noninstructional functions of the
  district (especially in small districts).
• Has a much broader job description than typical
  government finance officer.
• May serve under superintendent (unit control) or
  serve board directly (dual control).

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School Business Administrator Wearing Many Hats

• Planning and budgeting functions
• Linking strategic (instructional) plan to budget.
• Long-range financial planning to support capital
  and operating budgeting.
• Budget preparation
• Revenue, enrollment forecasts.
• Estimating required staffing and personnel
  budget.
• Estimating nonpersonnel budget.
• Grantsmanship Applying for categorical and
  project grants, forecasting impact of state and
  federal aid changes.

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School Business Administrator Wearing Many Hats

• Capital planning and management
• Facilities planning (Capital Improvement Plan).
• Maintenance planning (works with maintenance
  staff).
• School property management and security.
• Capital project management (during construction)
• Estimating required OM expenditures to support
  facilities and equipment
• Debt management work with financial advisor to
  evaluate capital finance options.

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School Business Administrator Wearing Many Hats

• Financial Control and Accounting
• Oversee operation of accounting system, and
  financial information system.
• Oversee preparation of financial reports.
• Contract with an auditor to do an independent
  audit. Make changes in response to audit.
• Manage execution of the budget monitor revenue
  and spending patterns, make adjustments to budget
  as needed, control transfers across budget
  categories.

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School Business Administrator Wearing Many Hats

• Working capital management
• Cash management
• ST borrowing
• ST investments.
• Purchasing and contracting out.
• Inventory management.
• Manage accounts receivable and payable.

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School Business Administrator Wearing Many Hats

• Personnel management
• Payroll
• Staff development
• Negotiations with unions.
• Service center management Monitor
• Transportation
• Food service
• Student accounts.

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Certification/Registration

• ASBO registration
• School business administrator
• MA (school business mgt. or educ. admin.)
• 3 years experience.
• School business official
• BA
• 3 years experience.
• School business specialist
• Does not require college degree
• 3 years experience.

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Certification/Registration

• New York certification requirements (school
  business administrator)
• B.A. degree and 24 semester hours of graduate
  study in school administration.
• Internship under supervision of practicing
  school administrator.
• 1 year of full-time experience as chief business
  official can substitute for internship.
• School business administrator certification
• http//www.highered.nysed.gov/tcert/certificate/re
  q_admin.htm

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Cash Flow Analysis

• Efficient cash management decisions are based on
  accurate analysis of cash flows and cash flow
  forecasts.
• Cash analysis involves determining the underlying
  seasonal pattern and annual trend in cash
  flows. For volatile cash flows, analysis of
  monthly data (or even a shorter time period) is
  essential.
• Looking at Figure 11-1 there is a distinct
  monthly pattern in cash flow. The big spike up
  every 3 months is due to quarterly property tax
  payments.
• The trend line indicates a slow increase in cash
  balance over the last 3 years.
• Cash analysis should be done for at least a
  3-year period.

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Cash Flow Forecast

• Using historical data, you can calculate monthly
  shares ( of annual total) for revenue and
  expenditures (Figure 11-2).
• Annual growth rates can be calculated to measure
  the trend (Figure 11-2).
• To determine a forecast, select annual growth
  rates for revenue and expenditures, and calculate
  new total. Then multiply total by monthly shares
  to get monthly revenue, expenditures, and cash
  flow (Figure 11-3 and Figure 11-4).

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Using Cash Forecast for Borrowing and Investment
Decisions

• Once a cash flow forecast is made, it can be used
  to make ST borrowing and investment decisions.
• Given that this is only a forecast, the actual
  flow will be different. Depending on the
  variation of past cash flow patterns, a decision
  needs to be made about the minimum cash balance
  that will be kept on hand. For this example, I
  have assumed 25 of monthly expenditure (20,000)
  will be kept as the cash balance.
• It is then possible to determine what is the
  optimal ST borrowing and investment. For
  investments, return is maximized when the
  maturity (length of investment) is as long as
  possible. See Figure 11-5 for an example.

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Short-term Borrowing

• Given the lumpiness of some revenue sources, it
  is possible that a district will experience
  periods of negative cash flow. The district
  needs to arrange with lenders for ST borrowing.
• Tradeoff in selecting borrowing is between
  interest rate (higher the longer the loan), and
  transaction costs associated with each loan.
• Types include
• Lines of credit commercial banks may allow a
  district to borrow up to some limit from the bank
  without prior approval. Convenient way to fill
  in small cash deficits, but transaction costs may
  be higher.
• Notes (tax anticipation notes, TANs, revenue
  anticipation notes, RANs, bond anticipation
  notes, BANs) generally provided in anticipation
  of a specific revenue source. Principal and
  interest may be paid on maturity.

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Short-term Investments

• Objectives
• Risk key goal is to protect the principal of the
  investment since it is needed to support
  operations.
• Liquidity Ideally would like resources to be
  readily available when needed. The longer the
  investment (and more severe the penalties for
  early withdrawal) the less liquid.
• Return as measured by the interest rate
  generally goes up with the length of the
  investment, and risk associated with the
  investment.
• Key tradeoff return versus risk and liquidity.
  More accurate the cash flow forecast, the longer
  the potential investment and rate of return.

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Short-term Investments

• Investments range in the level of risk, and
  maturity.
• Legally acceptable investments for all location
  governements but NYC
• U.S. Treasury Bills
• Other Notes from U.S. Government Agencies
• Certificates of Deposit
• Obligations of the state of NY.
• New York City (governments over 1 million) can
  also invest in
• Obligations of other states (with highest rating)
• Corporate bonds (with highest rating)
• Bankers acceptances
• Guaranteed obligations of U.S. Government
• See General Municipal Law, sections 10 and 11
• http//assembly.state.ny.us/leg/?cl48a3

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Figure 11-6 Types of Short-term Investments

• Instrument Issued By Maturities
• U.S Treasury bills U.S. Treasury 91 or 182
  days, 52 weeks
• Federal agency issues Loan guarantee Several
  days
• to 10 years.
• Certificates of deposit Commercial banks 1 to 18
  months
• Time deposits Banks 30-day minimum
• Bankers acceptances Banks 30 to 180 days
• Commercial paper Major companies 2 or 3 days to
  270 days
• Repurchase agreements Banks/security 1 day to
  several months dealers

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Investment Policy

• A good way to assure that investments match the
  objectives of the Board of Education is to
  formally develop and approve an investment
  policy.
• Some of the components in this policy should
  include
• General objectives of investments.
• Ethical standards, and delegation of authority.
• Selection of financial dealers
• Types of appropriate investments, and constraints
  on investments (maturities, diversification).
• Internal controls and reporting system.
• Source GFOA http//www.gfoa.org/services/special
  s/invplcy.shtml
• Investment policies in New York local government
  should have elements defined in Section 39 of
  General Municipal Law.
• Financial Management Guide for Local Government
  published by Office of State Comptroller also
  contains a model investment policy.
  http//www.osc.state.ny.us/localgov/muni/publist.h
  tmlgmg

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Investment policyWappingers CSD

• INVESTMENTS REGULATION
• Authorized Investments
• A. The District Treasurer is authorized to invest
  all available district funds, including proceeds
  of obligations and reserve funds, in the
  following types of investment instruments
• Savings Accounts or Money Market Accounts of
  designated banks
• Certificates of Deposit issued by a bank or trust
  company located in and authorized to do business
  in New York State
• Demand Deposit Accounts in a bank or trust
  company located in and authorized to do business
  in New York State
• Obligations of New York State
• Obligations of the United States Government (U.S.
  Treasury Bills and Notes)
• Repurchase Agreements involving the purchase and
  sale of direct obligations of the United States
• B. All funds except Reserve Funds may be invested
  in Revenue Anticipation Notes or Tax Anticipation
  Notes of other school districts and
  municipalities, with the approval of the State
  Comptroller.
• http//www.wappingersschools.org/Board/BPM/BPM6/BP
  M62401.html

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Diversification of Investments (GFOA Policy
Recommendation)

• Background. State and local governments are
  charged with observing the investment management
  objectives of safety, liquidity, and yield.
  Portfolio risk includes all the risks associated
  with investments, such as credit risk and market
  risk. Risks to safety and liquidity can be
  mitigated through diversifying the types and
  maturities of securities purchased. Because
  ensuring safety and liquidity are paramount,
  entities should seek to reduce portfolio risk as
  much as possible in their investment policies
  through appropriate diversification of
  investments in the portfolio and restrictions on
  maturity provisions.
• Recommendation. The Government Finance Officers
  Association (GFOA) recommends that state and
  local governments diversify their investments to
  reduce portfolio risk through such means as
  limiting investments to avoid overconcentration
  in securities from a specific issuer or business
  sector, excluding U.S. Treasury securities
  limiting investments in securities that have
  higher credit risks investing in securities of
  varying maturities and continuously investing a
  portion of the portfolio in readily available
  funds, such as local government investment pools
  (LGIPs), money market funds, or overnight
  repurchase agreements to ensure that appropriate
  liquidity is maintained to meet ongoing
  obligations.

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Practices to Improve Return on Cash Investments

• Maintain only interest-bearing bank accounts
  Even for regular checking accounts try to find
  account with interest. These have to be balanced
  against bank fees.
• Minimize the number of bank accounts Use
  concentration accounts that pool together idle
  cash from all the funds.
• Minimize number of banks used While maintaining
  good relations with local banks can be useful,
  especially when the district needs to borrow
  money, this can come at the price of lower
  interest earnings.
• Seek competition in banking services Competition
  often improves return on investment and improves
  banking services. Personal relationships with
  you local banker may not be worth the price of
  lost investment earnings.
• Source A Study of Cash Investments Practices
  for Local Governments in New York State.
  2000-PS-7, State of New York Office of the State
  Comptroller, October 2000. On the
  websitehttp//nysosc3.osc.state.ny.us/localgov/m
  uni/perf/2000ps7.htm

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Methods to Speed Receipts

• Set a high fee for late payments. Fee needs to
  be higher than prevailing interest rate to
  encourage payment.
• Lock boxes checks go directly to mail box that
  is collected and deposited by bank. See
  following.
• Electronic (wire) transfers Have grants, taxes,
  fees transferred electronically into bank
  account. See following

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Methods to Speed Up Receipts

• Use of Lockbox Services
• Background. Lockbox services are designed to
  expedite the collection of paper-based payments
  and provide timely payment information to update
  accounts receivable records. Lockbox services are
  provided by a third-party processor (usually a
  bank) that receives, opens and processes payments
  for a government entity or business. For most
  entities, lockbox services should increase
  payment and posting accuracy improve cash flow
  by reducing processing time between delivery of
  mail and depositing of payments and increase
  staff productivity by freeing personnel from the
  labor intensive process of manually handling mail
  and payments. There are two basic types of
  lockbox services wholesale (used for high
  dollar, low volume payments) and retail (used for
  high volume, low dollar payments such as taxes,
  utilities, licenses and fees, accompanied by
  standardized remittance documents). Retail
  lockbox services generally are of primary
  interest to government entities.
• Source GFOA, http//www.gfoa.org/services/rp/20

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Methods to Speed Up Receipts

• Electronic Transactions for State and Local
  Governments (wire transfers)
• Background. State and local governments are
  responsible for making a wide variety of payments
  to their employees, program recipients, vendors
  and other governments. In addition, governments
  receive revenue and fees from a wide variety of
  sources. Processing these disbursements and
  receipts can be time-consuming, resource
  intensive, and costly.
• Many governments and private sector entities are
  moving towards the electronic movement of funds
  and information to achieve the following types of
  benefits improved customer/employee relations
  reduced bank fees faster deposit and investment
  of funds improved cash flow certainty allowing
  better investment decisions easier and less
  expensive bank reconciliations reduced check
  production and distribution costs (e.g.,
  supplies, storage, security, printing, signing,
  bursting, mailing and handling) reduced check
  fraud fewer lost, stolen, and reissued checks
  and demonstrate to customers that the
  organization is customer oriented,
  technologically capable, and cost conscious.
• Recommendation. The Government Finance Officers
  Association (GFOA) recommends that state and
  local governments evaluate opportunities to make
  and receive electronic payments in the following
  areas
• Disbursements payroll, expense reimbursements,
  vendor payments, retirement payments,
  intergovernmental payments, other recurring
  payments
• Collections grant payments, repetitive
  collections - such as utility payments, tax
  payments, and license payments.
• In evaluating the costs and benefits of
  electronic payments, governments should consider
  at least the following factors bank fees,
  experience with fraudulent or returned checks,
  supply costs, administrative and processing
  costs, mail fees, impact (either positive or
  negative) on the availability of funds and
  interest earnings, and information technology
  resources and capabilities of the jurisdiction.
• Source GFOA, http//www.gfoa.org/services/rp/cash
  .shtml23

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Disbursement Policy

• Bills should not be paid in advance unless the
  discounts are higher than interest.
• Payment method evaluate the additional interest
  from use of checks (float while check is in
  process) with the reduced administrative costs
  from electronic transfers.
• Avoid late payments to employees and suppliers
  can affect future morale and service.

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Figure 11-7 Control for Cash Management
Receipts

• Persons responsible for handling cash receipts
  should not participate in accounting or operating
  functions relative to controlling accounts
  receivable, preparing and mailing due statements,
  or approving credits for returns or adjustments
  of amounts due.
• Receipts through the mail should be logged in the
  mailroom immediately, and receipts should be
  recorded within the day.
• Large receipts (1,000 federal threshold) should
  be deposited daily. All receipts should be
  deposited at least weekly.
• Copies of cash receipts should be checked against
  the record of cash received by someone other than
  the person receiving the cash.
• Wire transfers should be used for high-dollar
  cash receipts unless there are compelling reasons
  otherwise.
• Receipt records should be maintained in a
  location separate from cash checks.

For a good checklist provided by SED on internal
controls for cash see http//www.emsc.nysed.gov/m
gtserv/Internal20Control20MEC.doc
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Figure 11-7 Control for Cash Management
Disbursements

• Before vouchers are certified for payment, they
  should be reviewed for correctness of payee and
  payment amount, to verify correct delivery of
  purchased goods or service, and to check that
  payment is appropriate.
• Transactions should be verified, using
  statistical sampling procedures when transactions
  are numerous and other arrangements of records
  permit.
• Procedures should accommodate exploitation of
  discounts when economically warranted.
• Wire transfer/electronic funds transfer should be
  used as frequently as feasible for better
  control, to ease record keeping and to delay
  payment until actual due date.
• The process should prevent duplicate payments on
  invoices.
• Advances should be controlled, being used only
  when necessary. Excess travel advances should be
  collected promptly, managers should have periodic
  reports of outstanding travel advances, and
  systems should permit withholding of overdue
  travel advances from employee compensation.
• Source Mikesell (1999), adapted form William L.
  Kendig, Cash Management in the U.S. Department
  of the Interior, Journal of Cash Management
  (May/June 1985) 38-45.