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					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
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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).
             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
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                                     Linear (Cash Flow)                      Forecast
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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.
                                                                                                                           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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