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MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, and Glenn Olson, Deputy County Administrator, Clark County, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
Do You Know Where Your Cash Is?
January 2010
By Mike Bailey, Finance Director, City of Redmond
It is a bit dated now, but there once was a famous line: “do you know where your teenager (or some other subject of interest) is?” This is the thought I had when asked to put some thoughts together for an article on managing cash (and investments) in this difficult economic climate. In my experiences, I’ve seen several situations where the answer to that question (do you know where your cash is?) was “NO!”
Knowing where your cash is strikes me as fundamentally important to the government finance officer for many reasons. First there is the obvious; control of cash is a fundamental goal of internal control systems. Such systems are designed to safeguard assets of which I would classify cash as one of the most important. Whether it is preventing loss from theft or fraud, or preventing loss from investments that you are not adequately familiar with, control of cash (and cash equivalents) is crucial. Investment program policies typically have three tenets: safety, liquidity and rate of return. Safety is first for a reason. As a result sound internal control programs will have as a focus the safety of cash and cash equivalents (whether it is cash in transit, cash in hand or invested cash). This is a great place to start.
As I’ve said, I’ve encountered occasions where this wasn’t the case. For example a manager at the library called to say there was a problem with their financial reports in that the revenues were being underreported. Investigation revealed that (unfortunately) the revenue reports were accurate. The real problem was that they were sending their deposits through the interoffice mail to the treasurer (on an irregular schedule). Upon receipt of such an envelope, the treasurer confirmed the contents and made the deposit with the bank on their behalf. When we investigated the complaint by comparing the interoffice deposits sent by the library to those received by the treasurer there was a discrepancy. Where did the missing envelopes go (we wondered)? With no “chain of custody” (that is where one person signs that they are handing the cash off to another and the recipient signs that they’ve received the right amount of cash) we had no idea where the envelopes went missing. It wasn’t a lot of money (which is what lead those involved to believe it was an acceptable procedure) but any direct loss of public funds is a problem.
However, this isn’t an article about internal controls (though I hope I’ve caused you to wonder about that part of my question – do you know where your cash is). Another aspect of this question is the organization-wide management of the cash (and equivalents) as they pass from a customer into your possession wherever that may occur. For instance, I’ve encountered the following “flow chart” with regard to the movement of cash from the customer’s hands, into our systems (which includes recreation, building permits, fire permits, gun permits and many others).
Prior
flow of funds (and accountability)
New flow of funds (and
accountability)
In this first example we see the potential for improved efficiency in handling public funds (a bit of an understatement). This organization had never thought about managing cash from an organization-wide perspective before. Each cash receipting operation was developed in isolation. Each process individually made sense, but taken together they can obviously be made into a more cohesive (and more efficient) system. With this chart we started to unravel the disparate systems and worked to blend them into one comprehensive approach that made the management of cash within the system much more efficient (illustrated above). We were able to put the cash to work more quickly as well.
A third example is using cash as a key ingredient to confirm the financial house is in order. Much of the various types of financial transactions are managed through computer systems these days. We process purchase orders, pay bills, pay employees, withhold money for various benefits (and pay those vendors), reimburse petty cash accounts, process accounts receivable invoices, accept direct payments from customers and numerous other types of financial transactions. There can be thousands of transactions a month representing dozens of different types of processes. How can we be sure that these are all occurring as they should? In addition, as we summarize all of these transactions into succinct financial reports, how can we be sure the data we get in these summary financial reports is accurate? In my experience the best way is through old fashioned cash reconciliations.
Cash is (what I call) the ultimate filter for many of the financial transactions at some point in their process. The benefit of a solid cash reconciliation element to your internal controls is that it uses an external source (the activity in your cash and investment accounts maintained by the respective institutions) to compare against all of the internal activity described above. If there is a problem with one of the above processes, at some point it will likely result in a problem with the bank reconciliation. When you encounter that problem (the cash and investments as reported by your outside institutions does not agree with what your systems say it should be) you should investigate it immediately. The problem often is the result of a simple isolated error of some type. However if it is more than an isolated event, this process will often be a sure way to identify the underlying problem and inform you on the best approach to resolve it.
Lastly, managing cash-flow during difficult economic times will help you avoid problems and maximize the benefits of carefully managed cash and investment balances. In conducting peer reviews of dozens of budgets over the past few months I’ve seen more and more use of cash reserves to balance budgets. This means that those “rainy day” reserves are being drawn down and can no longer be relied upon to cushion cash-flows. For many local governments managing cash-flow is complicated by uneven receipt of revenues. These can include property taxes and other revenues generally only paid at certain times of the year. In these cases, the economic resource is available to fund budgets, but the actual cash may not materialize until later in the year.
While investment rates of return are less than they have historically been it is even more important to have all the cash in the system “working” (i.e. earning interest) to the extent possible. That means:
- getting cash through the various systems and into central repositories as soon as possible
- quickly and easily knowing what amounts of cash exist in the various parts of your systems and how much you can rely on to satisfy obligations (pay bills) and/or have to invest
- quickly and easily knowing what your investment options are in the context of your investment policy and existing portfolio
- quickly and easily being able to execute cash and investment transactions to minimize the downtime for cash
While managing investments is important, the current economy and dwindling reserves may cause more of us to need to assess how to deal with cash deficiencies as well. Short-term borrowing for cash-flow purposes may be necessary. In most cases, our “rainy day” reserves have provided the necessary cash-flow to cover the uneven receipt of revenues. However we may find that short-term borrowing will now be necessary as we have utilized some of those reserves as part of a strategy to preserve service during the economic downturn. If that is the case (short-term borrowing may be necessary and isn’t a normal course of events in your organization) here are a few things to think about:
- Do an even more careful projection of anticipated in-flows and uses of cash over the foreseeable future (the current budget period might be a good place to start). I would refer you to the article “Cash flow and Budgetary Variance Analysis” by Shayne Kavanaugh and Christopher Swanson, Government Finance Review, October 2009 for insight into how to accomplish this.
- Know how and when you will be repaying this loan. The cash-flow projection itself should document the ability and timing for repayment of the loan. If it doesn’t you may need to extend the time period for the review or revise your assumptions. Being able to clearly document the ability to repay the loan is very important.
- Work with legal counsel to determine the authority for such a loan. You may determine to borrow from other funds internal to the city or to borrow from a financial institution. In either case you will need to document the legal authority and its related obligations (interest paid on internal loans, legislative authority for the loan itself, etc.)
- Educate your administrative and legislative bodies as to the need for the loan and what taking a loan (which we are presuming is unusual in your entity’s case) signifies. These authorities will want assurance (both your assurance and documented assurance) that the loans will be repaid.
- If you decide to pursue the short-term loan from outside the organization, seek financial advisory services as to how to do this efficiently. If you are new to borrowing in the short-term market you should rely on trusted experts to help you accomplish this in the best possible way for your entity. GFOA has developed best practices on selecting such experts.
- Put the new cash to work. Once a loan is complete it is typically for more than is immediately needed (unless you’ve chosen a line of credit approach). Be sure to be prepared to invest the loan proceeds in accordance with the cash-flow needs of the organization.
Many of the above topics could be a research paper unto themselves. I’ve provided some highlights of the types of issues finance officers and others in the organization should think about while pondering where our cash is. The GFOA has a wide variety of resources on many of these topics both on their website (www.gfoa.org) and as publications (also accessible through the web site).
Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.
Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.
Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.
*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.