Lecture 11: School Business Administration and Cash Management EDA 757/PPA 730 Fall 2002 Lecture 11 Outline • Roles of school business administrator • Cash management – Cash flow analysis – ST borrowing – ST investments – Improving cash flow – Accountability for cash 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). 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. 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 O&M expenditures to support facilities and equipment – Debt management: work with financial advisor to evaluate capital finance options. 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. 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. School Business Administrator: Wearing Many Hats • Personnel management: – Payroll – Staff development – Negotiations with unions. • Service center management: Monitor – Transportation – Food service – Student accounts. 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. 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 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. Figure 11-1: Cash Flow Analysis 80,000.00 Series1 Linear (Series1) 60,000.00 40,000.00 20,000.00 0.00 ly ly ly ay ay ay y y y ch ch ch r r r r r r be be be be be be ar ar ar Ju Ju Ju M M M ar ar ar nu nu nu em em em m m m M M M te te te Ja Ja Ja ov ov ov p p p Se Se Se N N N (20,000.00) (40,000.00) (60,000.00) 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). Figure 11-2: Cash Flow Analysis Monthly Patterns and Annual Trend Based on 3-year Average Actual Actual Month Revenue Revenue Monthly Pattern (% of annual total): July 5.08% 7.98% August 5.81% 8.39% September 13.97% 7.88% October 6.54% 8.14% November 5.44% 8.43% December 13.44% 8.37% January 5.69% 7.59% February 4.75% 9.00% March 13.96% 8.77% April 5.21% 8.55% May 5.40% 8.53% June 14.70% 8.38% Annual trend (Percent change): Year 1 to 2 3.22% 0.61% Year 2 to 3 2.57% 0.60% Figure 11-3: Cash Flow Forecast Estimated Cumulative Estimated Estimated Cash Cash Month Revenue1 Spending1 Flow Flow July $55,198 $81,353 -$26,154 -$26,154 August $63,221 $85,457 -$22,236 -$48,391 September $151,890 $80,316 $71,574 $23,183 October $71,057 $82,935 -$11,878 $11,305 November $59,094 $85,913 -$26,819 -$15,514 December $146,176 $85,273 $60,903 $45,389 January $61,914 $77,289 -$15,375 $30,014 February $51,664 $91,742 -$40,079 -$10,065 March $151,819 $89,317 $62,502 $52,437 April $56,604 $87,093 -$30,489 $21,948 May $58,748 $86,886 -$28,138 -$6,190 June $159,882 $85,380 $74,502 $68,312 Total $1,087,267 $1,018,955 $68,312 $68,312 Percent change 2.70% 0.70% 1 Calculated by multiplying estimating annual total for revenue and expenditures by the monthly share (Figure 11-2). Annual total is calculated by multiplying annual total last year by 1 + selected percent change. Figure 11-4: Cash Flow Forecast by Month 100,000.00 Cash Flow Linear (Cash Flow) Forecast 80,000.00 60,000.00 40,000.00 20,000.00 0.00 ly ly ly ly y ay y ay y ay y ay ch ch ch ch Ja er Ja er Ja er Ja er ov er ov er ov er ov er ar ar ar ar Se Ju Se Ju Se Ju Se Ju b b b b b b b b M M M M ar ar ar ar nu nu nu nu em em em em em em em em M M M M pt pt pt pt N N N N (20,000.00) (40,000.00) (60,000.00) 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. 1 Figure 11-5: Cash Flow Forecast and Estimated ST Borrowing and ST Investments Estimated Cumulative ST Cash Cash Borrowing ST Investments Cash Month Flow Flow 1 month 1 month 2 month 4 month 10 month On Hand BeginningCash Balance 46,811 July -$26,154 $20,657 $20,657 August -$22,236 -$1,580 $23,000 $21,420 September $71,574 $69,994 -$23,000 $17,000 $11,000 $18,994 October -$11,878 $58,116 $10,000 $20,116 November -$26,819 $31,297 $20,297 December $60,903 $92,200 $15,000 $45,000 $21,200 January -$15,375 $76,825 $20,825 February -$40,079 $36,746 $5,000 $20,746 March $62,502 $99,248 $30,000 $28,000 $9,000 $21,248 April -$30,489 $68,759 $20,759 May -$28,138 $40,621 $20,621 June $74,502 $115,123 $75,000 $20,123 1 Target was to maintain a cash balance of approximately 25% of average monthly expenditure on hand in all months, $20,000. 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. 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. 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) – Banker’s acceptances – Guaranteed obligations of U.S. Government • See General Municipal Law, sections 10 and 11 • http://assembly.state.ny.us/leg/?cl=48&a=3 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 Banker’s 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 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/specials/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.htm#lgmg Investment policy Wappingers 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/BPM62401.html 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. 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 website: http://nysosc3.osc.state.ny.us/localgov/muni/perf/2000ps7.htm 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 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 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.shtml#23 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. Figure 11-7: Control for Cash Management: Receipts 1. 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. 2. Receipts through the mail should be logged in the mailroom immediately, and receipts should be recorded within the day. 3. Large receipts ($1,000 federal threshold) should be deposited daily. All receipts should be deposited at least weekly. 4. Copies of cash receipts should be checked against the record of cash received by someone other than the person receiving the cash. 5. Wire transfers should be used for high-dollar cash receipts unless there are compelling reasons otherwise. 6. 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/mgtserv/Internal%20Control%20MEC.doc Figure 11-7: Control for Cash Management: Disbursements 1. 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. 2. Transactions should be verified, using statistical sampling procedures when transactions are numerous and other arrangements of records permit. 3. Procedures should accommodate exploitation of discounts when economically warranted. 4. 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. 5. The process should prevent duplicate payments on invoices. 6. 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.
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