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Cash Flow Forecasting & AnalysisCGFOA 9.3.2020
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Who is Ehlers? Fully Integrated Services
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About Ehlers’ Investments• SEC Registered Investment Adviser (est. 2007)
• More than $1.5 billion AUM
• 145+ clients
• Focus = separately managed fixed income solutions
Bond proceeds investment
General funds investment
Cash flow forecasting
Banking RFP services
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Objectives
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• What is a Cash Forecast?
• Why is it important and beneficial?
• How to best utilize a Cash Forecast.• Analysis & Strategy
• Ways to construct a Cash Forecast.• Examples
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Best Practice:
GFOA recommends that governments perform ongoing cash forecasting to ensure that they have sufficient cash liquidity to meet disbursement requirements and limit idle cash.
The cash forecast period should be at least a 12-month rolling period, as opposed to a fiscal year basis. The forecast within this rolling period should be divided up in at least monthly sections for most governments, or weekly or daily for larger and more complex governments.
Cash Forecasting and Strategy
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What is a Cash Forecast?
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What is a Cash Forecast?
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Cash flow forecasting is the process of predicting cash flow, at least on a monthly basis, for the purpose of managing liquidity needs and for investment control.
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Assumptions
• Cash flows for the current year will follow a pattern similar to that of the previous years
• All of the budgeted revenues will flow in as cash (within the fiscal year)
• All budgeted appropriations will flow out as cash (during the fiscal year)
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Components of Cash Forecasts
• Cash Balances
• Investment Balances
• Projections of Receipts
• Projections of Disbursements
• Typical and Atypical
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The Cash Flow Forecast Process• Review historical cash flows (typically 2-5 years), your
knowledge to determine cash flow percentages by month
• Determine if there are any “statistically significant” seasonal changes in monthly flows
• Identify any growth trends
• Adjust your percentage cash flow data and apply it to your current year budget to project your cash flows
• Review projected flows with actual flows
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The Forecasting Method Used will Depend On:
• The time and resources you have available forforecasting
• The amount of funds you’re working with
• Your level of commitment to forecasting
• Ability to get accurate information
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Cash Forecasting and Strategy
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Benefits of Cash Forecasting• Ensure appropriate liquidity
• Improve investment earnings
• Helps from being too “short” and losing opportunities with “longer” investment options
• Helps minimize borrowing needs by identifying any cash shortfalls
• Provides Peace of Mind
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Tools Needed to Build Your Cash Flow Forecast
• Beginning cash/investment balances
• Historical or professional experience of cash receipts and disbursements
• Apply historical data and experience against current fiscal year’s budget
• Capital budget spending projections
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Recurring and Nonrecurring Receipts andDisbursements
Receipts and disbursements that flow in and out can be characterized as either recurring or nonrecurring
• Recurring flows are regular and predictable, and the timing and amount is usually known in advance. An example of recurring receipts include property taxes. Examples of recurring disbursements include salaries andwages.
• Nonrecurring flows are irregular and unpredictable. The timing andamounts are usually not known in advance.
An example of nonrecurring flows include receipts from the sale of assets. Nonrecurring disbursements include items like capital projectexpenditures.
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Major Revenue Sources• Taxes• Special Assessments• Federal, State and Intergovernmental Revenue• Charge for Services• Investment Earnings• Other Revenues• Transfers In
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Nonrecurring Revenues
• Bond Proceeds
• Sale of assets
• Land
• Buildings
• Surplus Equipment
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Major Expenditure Sources
• Salaries & Fringe Benefits
• Contractual Service
• Internal Services
• Non-Departmental
• Capital Outlay
• Interest on Debt
• Transfers Out
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Nonrecurring Expenditures
Capital projects are the largest nonrecurring expenditure item
• Work with department heads and engineersto develop estimates for projects.
• Explain the importance of cash flow to the success of the capital expense.
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A Forecast Identifies Short & Long Term Needs
• Identifies an optimal allocation of Funds• Funds needed short-term to meet your cash flow
needs for operations• Funds that could be invested longer-term
• The management of short-term funds are based on cash flow requirements
• The management of longer-term funds are based on market conditions and the current yield curve
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General Rule in Cash Forecasting• Best to forecast only those categories that account for
5% or more of the budget
• Combine items that fall outside of the 5% range into an “Other” category
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Review Your Cash Flow Forecast
• Compare actual cash flow to the projected amount.
• Identify any large variances.
• Adjust assumptions as needed.
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Watch Out for Changes!
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-1,500,000
-500,000
-1,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
3,000,000
3,500,000
1 2 3 4 5 6 7 8 9 10 11 12
Projected Actual
Projected vs. Actual
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Connecting Cash Flow and Investments
• Comparing the current investment holdings with the cash flow forecast to determine cash over/under funding to maximize cash and investment returns to create a reliable and predictable source of revenue.
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Cash Flow Analysis and Investments
Overlay of forecasted cash flows with investment positions and related maturity dates
Will help you see:
• Periods of time where you may be over or under invested
• Where you may need to borrow funds to meet cash spendingrequirements
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What will does an Overlay Tell Us?
• Identifies months where the investment coming due was not large enough to meet cash flow needs
• Identifies months where investments are coming due but aren’t needed because of positive cash flow
• Helps you identify excess cash so you can invest the excess to periods where you need additional funding.
• Builds a Strategy and a Story around your Cash and Investment decisions
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1 2 3 4 5 6 7 8 9 10 11 12
Dol
lars
(1,000,000)Month
(2,000,000)
4,000,000
Net Cash Position From Operations3,000,000
2,000,000
1,000,000
-
Cash Flow Analysis and Investments
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300,000
400,000
0
50,000
100,000100,000
150,000
250,000
200,000200,000
300,000
350,000300,000
400,000
450,000
Oct-15 Nov-15 Dec-15 Mar-16 Jun-16
Par V
alue
Months
Investment Portfolio
Cash Flow Analysis and Investments
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Example - Combined Cash Flow
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Total
Cash from Operations 559,350 93,850 3,046,375 -536,125 -298,650 -318,650 -863,650 -363,625 -413,625 -428,800 6,525 -482,975 0
Cash FromInvestments 300,000 400,000 100,000 300,000 200,000 1,300,000
Net Cash Position 559,350 93,850 3,046,375 -236,125 101,350 -218,650 -863,650 -363,625 -113,625 -428,800 6,525 -282,975 1,300,000
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Cash Flow Forecast example
5,000,000
5,500,000
J A S N A M J
Cash Flow Projection
O
Core Cash
D J F M
Ending Cash & Investments
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000Core Cash
1,500,000
1,000,000
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Examples - Large Cash Balances
$-
$2,000,000.00
$4,000,000.00
$6,000,000.00
$8,000,000.00
$10,000,000.00
$12,000,000.00
$14,000,000.00
$16,000,000.00
Jan-
18
Feb-
18
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Apr-
19
May
-19
Jun-
19
Jul-1
9
Aug-
19
Sep-
19
Oct
-19
Nov
-19
Dec-
19
Jan-
20
Outflow Compared to Avg. Monthly Balance
Avg Combined Balances Largest Debit
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Examples - Simplified Ins and Outs
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Examples - Ins and Outs with Net Flow
-4,000,000.00
-3,000,000.00
-2,000,000.00
-1,000,000.00
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
Jan-
18
Feb-
18
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Apr-
19
May
-19
Jun-
19
Jul-1
9
Aug-
19
Sep-
19
Oct
-19
Nov
-19
Dec-
19
Jan-
20
Net Cash Flow - Max
Purchases Redemptions Net Cash Flow
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Examples – Cash flow with Standard Deviation
-
20,000,000.00
40,000,000.00
60,000,000.00
80,000,000.00
100,000,000.00
120,000,000.00
Jan Feb March April May Jun Jul Aug Sep Oct Nov Dec
City of ABC: 95% Confidence Interval of Cash Reserves
+2 Standard Deviation -2 Standard Deviation 2020 Forcast at Average Growth
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Examples – Historical Cash Flow
$-
$20,000,000.00
$40,000,000.00
$60,000,000.00
$80,000,000.00
$100,000,000.00
$120,000,000.00
$140,000,000.00
$160,000,000.00
Jan Feb March April May Jun Jul Aug Sep Oct Nov Dec
City of ABC - Historical Total Assets
Restricted Cash 2016 2017 2018 2019
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Examples - Complex
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Examples – Live Examples
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Tips to Help Improve Your Forecast:• Try to be accurate and err on the conservative side.
• Concentrate on forecasting major items.
• Keep your forecast simple.
• Retain all your forecasting documentation.
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Conclusion• Like exercising, getting started is the hardest part of cash
flow forecasting
• Once you begin to gather your historical data and build the model, the process tends to flow smoothly
• Once built, the forecast model is easier to keep updated and only requires a relatively small amount of time to keep it up to date
• Find a system that works for you!
• The benefits of a cash flow forecast outweigh the effort!
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Thank you
9/3/2020 41
Ryan Miles, CPFIM
Senior Investment Advisor
303.802.2311