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Cash management is the process of maximizing the liquid assets through the acceleration of receivables and the disciplined control of disbursements.

The amount of cash to be held can be determined by balancing two kinds of cost decisions:

Elements of Cash Management

Cash management is made up of four elements: (1) forecasting, (2) mobilizing and managing the cash flow, (3) maintaining banking relations, and (4) investing surplus cash.

Forecasting can be defined as the ability to calculate, predict, or plan future events or conditions using current or historical data.

A cash budget monitors how much money will be available for investment, when it will become available, and for how long.

Cash mobilization involves techniques used to assemble funds and make them readily available for investment

Maintaining good relations with banks, savings and loan associations, investment bankers, commercial paper dealers, and security analysts is an important part of cash management.

Bankers prefer compensating balances to fee payments because deposits are the main source of a bank's loanable funds.

A cash budget should provide an estimate of the organization's cash requirements for disburse-ment by months, weeks, or days.

The most attractive instruments are securities supported by the full faith and credit of the federal government.

Other relatively risk-free securities are: time deposits, time certificates of deposit (CDs), commercial paper, banker acceptances, and repurchase agreements.

Cash Flow Forecasting

To ensure that sufficient funds are available to meet organizational needs at a minimum cost:

Management decisions that elicit the flow of cash include:

An astute manager uses a cash budget to identify early signs of an impending cash problem and to indicate appropriate steps to avert the problem.

Forecasting provides a basis on which to measure the differences between actual events and the plan, so that the nature and extent of corrective actions can be more clearly defined.

Local governments must develop reliable estimates of their cash flow positions to take full advantage of the securities market and to maximize the returns on whatever financial assets they are able to purchase.

Cash Mobilization

Cash mobilization involves: (1) acceleration of receivables and (2) control of disbursements.

The flow and availability of cash to the organization can be expedited by collection systems that provide for advance billing and payment on or before receipt of goods and services.

Techniques used to accelerate receipts include:

Disbursements are the outflow of funds in the form of checks issued and cash payments made.

Delaying cash outflows enables an organization to optimize earnings on available funds.

Consolidation of accounts reduces compensating balance, provides better control over the timing of payments, increases the effective use of surplus cash, and permits the streamlining of banking relations.

Zero balance accounts are concentration accounts that are "zeroed out" at the end of each banking day, thereby (1) eliminating the need to maintain excess amounts in disbursement accounts; (2) relieving the cash manager of the burden of estimating when checks will be presented for payment; and (3) permitting the pooling of resources for investment purposes.

Cash management must be artfully blended with the need to maintain good public relations with the vendors that serve the jurisdiction.

Revenue Enhancement Initiatives

Tax diversification is difficult for local governments because, in most cases, it is not within their authority to determine their sources of revenue.

Amnesty programs for delinquent taxes, coupled with enforcement of stiffer penalties for tax evasion have been enacted to provide inducements for the recovery of back taxes.

Compensatory payment programs are designed to reimburse local governments for revenues lost because of tax-exempt provisions attached to properties and for cost of providing services.

Service charges promote revenue stability by diversifying local revenue sources and by reaching beneficiaries of local services who would otherwise escape taxation.

Tax exportation is the shifting of the local revenue burden to non-residents through such measures as taxes on hotel, motel, and restaurant bills, entertainment taxes, commuter taxes, airport taxes, and taxes on businesses that sell their products or services to customers outside the taxing jurisdictions.

Reciprocity involves a mutual exchange of enforcement and/or collection responsibilities between jurisdictions.

Gambling and lotteries offer cash-strapped state and local governments the prospect of raising significant revenues without increases taxes.

Fiscal note legislation requires independent cost estimates of the fiscal impact on localities of mandated costs.

Local governments have the option of commercializing services which previously were rendered free of charge.


Cash flow projections should enable the fiscal manager to arrive at reasonable predictions as to how much money will be available to invest and for how long.

Public Investment Criteria

The principal criteria considered in selecting a specific security include:

The maturities of the various securities and how these would affect the portfolio mix must be understood before a fiscal manager decides to invest in them.

In general, securities with little risk, high liquidity, and short maturities also have low yields; for an investment to provide a high yield, the other criteria must be compromised.

Many state legislatures restrict the investments of local governments to securities that are collateralized or backed by the United States government.

Types of Securities

Local governments and other public organizations often hold short-term securities that can be readily converted into cash either through the market or through maturity.

U.S. Treasury bills (T-bills) represent an obligation of the federal government to pay a fixed sum of money after a specified period of time from date of issue.

T-bills have no default risk and can be sold quickly for relatively predictable prices in the secondary market.

Zero Coupon Treasury securities represent ownership of interest or principal payments on United States notes or bonds purchased at a discount of 20% to 90% off the $1,000 face value.

Certificates of deposit (CD) are receipts for funds that have been deposited in a commercial bank for an agreed upon period of time.

Two types of CDs: (1) negotiable, which the original investor can sell to another party on the secondary market; and (2) non-negotiable, which must be retained by the original investor until maturity.

Federal agency securities are issued by government-sponsored, privately-owned agencies established to implement federal policies and include Federal Farm Credit bonds, Federal Home Loan Bank bonds and discount notes, and Federal National Mortgage Association bonds.

Repurchase agreement are contracts between two parties whereby one party sells an instrument (e.g., T-bill) to the other and agrees to buy it back at a later date at a specified higher price.

Two types of repurchase agreements: (1) fixed--a specific interest rate and maturity period are established at the outset and a penalty levied if liquidated prior to maturity; and (2) open--agreement may be liquidated at any time, with the interest rate dependent on the duration of the transaction.

Banker's acceptances, usually created in conjunction with foreign trade transactions, are time drafts negotiated by commercial banks to finance the shipment or storage of goods.

Commercial paper includes promissory notes of finance corporations or industrial firms which offer higher yields than T-bills.

Derivative securities derive their value from some form of investment, such as Treasury bonds, corporate stocks and bonds, foreign currencies, or commodities contracts.

Arbitrage occurs when a jurisdiction issues bonds at one rate of interest and invests the proceeds at a higher rate of interest; the resulting gain is referred to as arbitrage earnings.

Portfolio Management

The fund manager should possess both formal education and releated experience in investment banking, financial counseling, or related fields.

The fundamental objective of cash management is to maximize yield and minimize risk.

It is important to design an investment portfolio whereby each security will mature close to the time when the money invested will be needed.

Constraints on Public Investments

Local government investments are regulated by state statutes presumed to reflect public policy.

Local jurisdictions impose additional limitations on their investments to mitigate risk, to diversify investment holdings, and to avoid weak financial institutions.

Banks are required to pledge securities as collateral to secure public investments, the costs of which usually are passed on to the public entity in the form of reduced rates of return.

State-managed investment pools resemble money market mutual funds in their portfolio composition and provide professional management, diversification, and money market rates of return which minimizes the risk to smaller jurisdictions.

Summary and Conclusions

Primary benefits of an investment strategy must be measured in terms of the increased interest earned through the investment of temporarily idle cash.

State laws protect public funds by: (1) limiting banks with which local governments can do business, (2) determining the amounts that can be left on deposit in each bank, and (3) requiring collateral for uninsured funds.

Local governments confront (1) the need to expand revenues if public demands are to be met, (2) already heavily burdened taxpayers, and (3) narrow restrictions on their ability to borrow to finance public expenditures.

The investment portfolio is a source of additional revenue that does not involve increased taxation or additional debt.

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