[Image] GFOA Logo Treasury Management April 6, 2007

Volume 25, Number 4
Inside This Issue

Feature Articles and Resources

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Economy and Interest Rates

Investment Performance Benchmarks
  • Performance Benchmarks
    • 10-Bill Index
    • Money Market Fund Index
    • LGIP Index
    • Key Rates: Cash Markets
    • Relative Value Yield Chart

Getting Started with Cash Flow Forecasting

By Keith Sawdon

Many of us responsible for investing the public's funds have many tools in place to help us. We have a written investment policy that has been adopted by our oversight board, a sound system of internal controls (for investment activity) that has been reviewed by our external auditors, solid methods for competitively bidding our securities purchases, and we have developed a good set of reports that help convey our investment activity.

In Brief: Cash Flow Forecasting
Cash flow forecasting is an estimate of receipts and disbursements during a given period. When used as a cash management guide, this tool can lead to the optimization of funds as well as insuring sufficient liquidity is present to meet liabilities. Cash forecasting is distinct from governmental accounting and budgeting in that the forecast is done with intent to measure the organization’s ability to meet needs in light of resources with the ultimate goal of negating the need for any short-term borrowing and to avoid the liquidation of any long-term securities (investments). When done on an organizational level, spending patterns can be coordinated to mitigate any potential shortfalls and level off flow of funds.

One tool that may be overlooked is a cash flow forecast. To effectively manage the public's funds, it is important to know your future cash flow position.

What is Cash Flow Forecasting? 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. An accurate forecast provides the investment official with the essential information needed for making sound investment decisions.

A good cash flow forecast should answer the following questions:

  • How much cash is available?

  • When will it become available?

  • How long will it be available?

Building a good cash flow forecasting model takes time and effort. Are the benefits greater than the costs? To answer that question it is important to understand the benefits of cash flow forecasting. Those benefits include: improved investment earnings, ensured liquidity, and identification of any cash flow shortfalls.

Improved investment earnings and ensured liquidity go hand in hand. If you do not know when funds will be needed for disbursements, your tendency will be to only hold investments with exceptionally short maturities. This ensures that you will be able to meet your payment obligations – but to get that liquidity, investment yield is normally given up (in an upward sloping yield curve environment). If you can predict when funds will actually be needed, you will still be able to ensure liquidity, and at the same time, improve investment performance by taking advantage of longer maturities in an upward sloping yield curve environment.

Another benefit of cash flow forecasting is that it can help identify any periods where you may actually have a negative cash position requiring some form of short-term financing.

The type of forecast you undertake will, in part, depend on the time and resources you have available to commit to the program and the benefits to be received. For the most part, building cash flow models that provide you with monthly estimates (of your cash position) will be the norm. But some governments may need weekly estimates, and very large investment portfolios may need daily estimates. The forecast timeframe chosen should be based on the time and resources available.

How to Build a Cash Flow Forecast. First, start with your current cash and investment balances. Then, look back at your actual cash collection and expenditure history by month. Apply the actual receipts collected or expenditures made against your amended budget for that year. The result is a percentage that represents actual cash collections or expenditures made against the budget for that month. Once you have looked back in history for three years, apply the three-year monthly average of those monthly percentages against the current year's budget.

History will be a good predictor of normal, recurring operating revenues and expenditures, but it doesn't address all the issues you will need to forecast. Issues such as new revenue sources or capital spending programs (nonrecurring expenditures) have no history to look back to, so you will need to work with departmental personnel to determine when funds will be coming in and when funds will be going out.

Whenever you are working with historical data, remember that changes in the economy, state law, user fees, etc., can cause the past data to give a false reading on future cash positions. That is why it is important to validate your forecasting model. Compare your projected cash position with the actual cash position. This comparison of actual to predicted helps you ensure that historic cash activity can be a good predictor of the future and that the assumptions that you used are correct. If you have large variances between actual and predicted you need to ask, “What caused the variance? Do I need to change my assumptions? Has something changed?” Finding out why will help you improve your cash flow forecast for the future.

Just Do It. Like exercising, getting started is the hardest part of cash flow forecasting. Like most of us, the hardest part of exercising is not using the equipment, it is getting to the room to use the equipment. Once you get to your exercise room, using the exercise equipment is not that bad. Cash flow forecasting is the same. Once you have decided that you need or want a forecasting model, getting going is the hardest part. But once you begin to gather your historical data and build the model, the process tends to flow pretty smoothly. It is the getting going that is the hardest. Once the forecast model is laid out, keeping it updated requires only a few hours a month. All in all, the benefits are worth the effort.

KEITH SAWDON is the chief deputy treasurer for Oakland County Michigan and author of the Association of Public Treasurers publication Cash Flow Forecasting.

Steps to Cash Flow Forecasting

By Lee Buffington

When most of us analyze our personal budgets, we know our fixed expenses like rent, mortgage, insurance, and utilities. We also can plan for elective expenditures like a new car or a nice vacation. In addition, most of us know the amount of our paycheck and when we will receive it. In other words, we are in control.

In the public sector, however, we do not always know what to expect. The legislative body may decide to spend our money on an unanticipated project. Or perhaps the state legislature will work their magic on what was once our expected revenue. Budgets are frequently built based on expected yearly expenditures, while cash inflows and outflows vary by month. Expenditures and receipts may balance at the end of the year, but chances are they will not balance month-by-month, which results in negative balances.

Why Should You Forecast? A good cash flow forecast enables good cash flow management and reduces the need for borrowing. Forecasting also helps maximize investment earnings by showing when funds will be available for investment. As a finance officer, forecasting gives you the confidence to certify that you have sufficient funds to cover the next six months of expenditures.

How to Do a Cash Flow Forecast.

  1. Decide on the time period your forecast should cover. For us, a 16-month forecast provides a better view into the future than the typical 12-month forecast. We use a 16-month forecast because California counties only have a positive cash flow three or four times a year, so it takes 16 months to include up to two income cycles in the forecast.

  2. Review your accounting history for revenue and expenditures – get the general picture.

  3. Create a simple, one-page forecasting form to begin tracking your revenue, expenditures and investments.

    a. Use tracking categories that are simple and meaningful to you.

    b. Include the following: net cash flow balance, negative cash flow, and maturing securities that could be called.

    c. Use your morning bank report and daily forecast to determine how much money you need to place each day to be fully invested.

  4. Start with what you know and gradually build up the reliability of your forecast. Remember: keep it simple.

  5. Monitor and fine tune your forecast. Beware of fluctuations in near term numbers. Watch the revenue side for significant changes. Review heavy user expenditure patterns. Monitor the incidental user. Make adjustments to your forecast to accommodate changes.

Lee Buffington is the tax collector-treasurer of San Mateo County, California.

Enhancing Cash Forecasting

By Kathy King-Griswold, CTP, CBM

A recent survey conducted by the Association of Financial Professionals of Canada revealed that the most important issue among financial professionals is improving the cash forecasting process. Due to the inverted yield curve, the economic slowdown, and the lack of general liquidity in the market, cash flow forecasting has become more important during recent years. An accurate estimate of future revenues and expenditures allows the treasury officials to gain greater visibility into business performance. It also helps to keep decision making on track and maximize investment opportunities. A good cash forecast gives an organization sufficient time to devise remedies for anticipated temporary cash shortfalls and arrange short-term investments for temporary cash flow surpluses.

Cash forecasting is important, but organizations often find it difficult to accurately identify a correct estimate. Some factors that contribute to poor quality forecasts include:

  1. Manual processes
  2. Seventy-five percent of treasury's time spent on data collection, which results in time lost for analyzing positions and effective management
  3. Inconsistent assumptions
  4. Junior-level forecast responsibility
  5. Lack of incentives and accountability in business units.

Cash flow plans are living entities and must constantly be modified as new information becomes available on future cash inflows and outflows. Each budget should be analyzed and the cash flow effect should be determined. After reviewing the budget, look for significant discrepancies between the planned and actual figures and make timely adjustments to the model. Some previous experience is necessary t o make proper adjustments. The last step in the process is to review and approve the cash flow forecast. Review by upper management will help to insure the accuracy and reliability of the forecast.

Seven Ways to Enhance Cash Forecasting
  1. Improve availability of data and quality of information – The availability and quality of cash management data is a particularly important hurdle to enhance cash flow forecasting. The following can be used to improve the availability and quality of data:

    • Treasury workstations

    • Account structure – using a single master account to collect all cash inflows and disperse vs. multi accounts.

    • Treasury Intranet site – can improve the quality of input and allow for easier sharing of information stored in spreadsheet files. This may also assist in finding a “home” for unclaimed and un-posted receipts and disbursements, which improves the quality of bank account reconciliations.

    • Use specific knowledge from business units – business units generate their cash flow forecasts when creating their annual plans because treasury would not be able to forecast certain expenditures or receipts for business units because they are not aware of all activities at that level.

    • Manage the expectations of management – Treasury should take extra precautions in presenting forecasts to management and identify assumptions very clearly.

  2. Provide treasury with greater payment visibility by migrating vendors to e-payments.

  3. Calculate the opportunity cost of inaccuracy – it makes a clear difference how the comparison between forecast and actual is fed back to the sources. This helps to provide a practical understanding of the importance of accurate forecasting.

  4. Statistical analysis – comparing forecasts to the actual cash flow that was processed by banks can reveal correlations and consistent behavior. This comparison can reveal opportunities for improving the predictability of a forecast.

  5. Use Treasury more as a planning resource or internal consultant and less as a payment processor.

  6. Continually monitor and adjust performance to the cash forecast.

  7. Use technology that integrates bank data into forecasting solution.


In conclusion, the reliability of cash flow forecasting has become more important in recent years due to internal and external pressures. An improved cash flow forecast can produce many benefits including: more cash available for internal lending and external investment opportunities, less adjustment transactions, and earlier warning signals. However, because cash flow forecasting involves many individuals across an organization, improvement projects require a strong commitment and a skilled, dedicated, and multi-disciplinary project team.

Kathy King-Griswold, is the assistant treasurer for the University of Rochester in Rochester, New York.

Useful Resources on Cash Flow Forecasting

Cash Management-Related Sessions at the GFOA Annual Conference

The upcoming GFOA conference in Anaheim, California on June 10-13, 2007 will include the following sessions related to cash management and banking relations. More information on the GFOA conference is available on GFOA's Web site.

Paper or Plastic? Using Purchasing Cards to Reduce Costs and Maintain Control. Purchasing cards have the potential to simplify purchasing, reduce paperwork, expedite delivery of services, and cut costs while maintaining effective internal controls in the treasury function. But, as with all tools, it is important to know how purchasing cards should be used and how to prevent potential abuse. Learn how leading governments use purchasing cards to improve their procurement processes in this informative session. The session will feature a panel of representatives from the card industry, banking, and government.

Fraud Prevention Techniques for Treasurers. Payment fraud does not go away, it just goes digital. Learn effective techniques to protect your government against payment fraud in an increasingly complex banking environment. In this session, fraud prevention experts share the latest practices and technologies for avoiding fraud in check payments as well as in the accounts payable and accounts receivable functions.

Preparing for the Worst of Times: Treasury Management in Emergencies. Earthquakes…hurricanes…terrorist attacks. The list of threats seems go grow, and they all affect a local government’s treasury management activities. While you can't control when a disaster occurs, you can control your government's level of preparedness. By knowing your vulnerability and what actions to take in advance, you can reduce the impact on your treasury activities. This session will introduce disaster response tools for the treasury function. Speakers will illustrate how these have been applied successfully in recent disasters including Hurricane Katrina.

Technologies for the Treasury Function. New technologies that help governments move from paper to electronic payment hold great efficiency potential for government agencies. Speakers will introduce promising technologies that can help treasurers improve productivity while maintaining financial controls. Topics will include: electronic check processing, electronic bill presentment and payment, and the “mobility trend” –the use of mobile devices such as cell phones and PDAs to manage treasury functions.

Getting the Most From Your Banking Relationships. New banking technologies have enabled many governments to reduce operating costs in the finance department by including new services in their banking agreements. Banks can provide customized reporting, easy access, and improved multi-factor security. Speakers at this session will discuss the new services available, key components of a banking relationship review, and

Maximizing the Benefits of Remote Check Deposit. “Remote Capture” is a hot topic in the banking industry. What is it and how can your government benefit from this technology? What key factors can make or break remote capture? This session will feature local government treasury managers who will discuss their experience with remote capture, the challenges they encountered, and the lessons they learned.

Economy and Interest Rates
Panel of Economists
Interest Rate Outlook





Fed Funds 5.25

5.25 - 5.25

5.25 - 5.25

5.00 - 5.25
30-day prime bank (CD) 5.29

5.25 - 5.30

5.20 - 5.30

4.90 - 5.30
3-month T-bill yield 5.01

4.95 - 5.10

4.90 - 5.20

4.60 - 5.20
5-year Treasury note 4.60

4.50 - 4.70

4.50 - 4.85

4.25 - 4.90
30-year Treasury bond 4.72

4.70- 4.80

4.70 - 4.95

4.65 - 5.00
The Public Investor's panel of eminent institutional economists projects interest rates for the first day of each forecast month. Averages are the midpoints between the arithmetic mean and the median of individual projections. The low and high individual forecasts illustrate the range.

Interest rate forecast panelists

Avery Shenfeld

CIBC World Markets

John Silvia

Wachovia Securities

Carl R. Tannenbaum

LaSalle Bank ABN/Amro


Carl Tannenbaum of ABN-Amro/LaSalle Bank does not expect significant “contagion” from sub-prime mortgages. He anticipates a “soft landing” scenario, as household and business spending moderate and the housing sector bottoms out. The Fed should remain on hold due to persistent inflationary pressures that are at the limit of the Fed’s tolerance level.

Economic Outlook

Since the recent downward revision in the GDP, there has been more talk about the fragility of the current economic expansion. This month, we asked the Public Investor panel of economists if there is a cause for concern.

Avery Shenfeld of CIBC World Markets expects that the spillover impacts from the recession in housing and soaring mortgage defaults will slow consumer spending and borrowing. This will lead to a GDP growth rate of under 2 percent in the middle two quarters of the year and allow core inflation to trend lower. However, interest rate relief from the Fed in the second half of the year should prevent an outright recession.

John Silvia of Wachovia Securities predicts economic growth of 2.4 percent with CPI inflation at 2.6 percent. He expects that the Fed will keep rates unchanged over the next six months.

Lacy Hunt of Hoisington Investment Management states that monetary and fiscal conditions remain restrictive and suggest increasing economic weakness. He notes that the yield curve has been inverted for almost nine consecutive months and the federal funds rate remains well above the growth of nominal domestic sales. In addition, household credit market borrowing, as a percent of disposable personal income, registered the second straight year over year contraction – a condition historically associated with severe slowdowns or recessions.

Snapshot of Economy and Interest Rates

Economic Summary




Economic Growth      
Real GDP growth
Annual rate, constant dollars
IV Q '06
III Q '06
Year Ago
Retail sales
$ billions
Year Ago
Industrial production index
Change, monthly and annually
12 mo. chg.
Leading indicators index
Change, monthly and annually
12 mo. chg.
New housing starts
Thousands of units, annualized
Year Ago
Purchasing Management Index
Institute for Supply Management
Year Ago
Consumer price index
Change, monthly and annually
12 mo. chg.
Producer price index
Change, monthly and annually, seasonally adjusted
12 mo. chg.
GDP price deflator
Annual rate
IV Q '06
III Q '06
Year Ago
Unemployment rate
Year Ago
Money market fund maturities
Average portfolio maturity
(Money Fund Report Averages TM)
Mar 27
41 days
Feb 13
42 days

Mar '06
37 days

Moving Averages
6-Month Treasury Bill

2-Year Treasury Note

10-Year Treasury Note

Investment Performance Benchmarks
The Public Investor 10-bill index
Quarterly/Monthly Return
Annualized Returns Since
Jan.1, 2006
Jan. 1, 2005
Jan. 1, 2006


Jan. 1, 2007
Feb. 1, 2006


Mar. 1, 2007
April 1, 2007
The money market fund index
Annualized Returns Since
Average Return
Jan.1, 2006
Jan. 1, 2005
Jan. 1, 2006 3.51%
2.47% 1.29%
Jan. 1, 2007 4.85%
4.39% 2.78%
Feb. 1, 2007 4.85%
4.42% 2.85%
Mar. 1, 2006 4.85%
4.45% 2.91%
April 1, 2006 4.87%
4.47% 2.98%
S&P Rated LGIP Index
7-day yield
30-day yield
Maturity (Days)
March 23 , 2007
Key Rates: Cash Markets
Rate 03/30/07 Year Ago
Fed funds 5.38 4.88
CDs: Three months 5.33 4.93
CDs: Six months 5.28 5.07
BAs: One month 5.29 4.79
T-bills: 91-day yield 4.93 4.50
T-bills: 52-week yield 4.90 4.84
Commercial paper, dealer-placed, 3 months 5.30 4.91
Bond Buyer 20-bond municipal index 4.25 4.53
Tax-exempt notes 3.56 3.52
Relative Value Yield Chart

Moving Averages - Public Investor's four-week moving averages are calculated as a simple average of Friday closing yield quotations for the most recently offered six-month Treasury bill (discount basis), two-year Treasury note, and 10-year Treasury note. Moving averages are used by analysts to monitor trends and trend changes. Generally, interest rates are increasing (prices falling) when the moving average yield is rising and the current rate exceeds the moving average. Conversely, current yields below a declining moving average are associated with lower interest rates (high prices on fixed-income securities). Some market timers buy (or sell) longer maturities when current market yields fall below (or penetrate above) their moving averages.

The Public Investor 10-bill index - This index consists of 10 hypothetical Treasury bill investments, with an average maturity of approximately 80 days. Every other Thursday, a T-bill matures and proceeds are reinvested alternately in the three-month and six month T-bills. This rolling index provides a benchmark for evaluating cash management portfolios with biweekly payment and payroll requirements. The original value of the index was 97.6765 on July 1, 1984.

The money market fund index - This index is the simple average of Money Fund Report Averages ™ seven-day money market fund indexes, as reported for the two weeks closest to the end of each month. The annualized return is calculated using these rates for a four-week period centering on the first of each month. The results should simulate returns from passive investment in an average money market fund.

S&P Rated LGIP Index
- This index is comprised of local government investment pools that are rated AAAm or AAm by Standard & Poor's and represents pools that strive to maintain a stable net asset value.

Executive Director/CEO:   Jeffrey Esser Editor:   R. Gregory Michel

The Public Investor is published monthly by the Government Finance Officers Association (GFOA), 203 N. LaSalle Street, Suite 2700, Chicago, IL 60601. (312/977-9700; email: PublicInvestor@gfoa.org) Annual subscription rates are $55 for active GFOA members, $70 for associate GFOA members, and $85 for nonmembers. For reprint permission contact GFOA.

The information and opinions printed herein are from sources believed to be reliable, but GFOA makes no guarantee of accuracy. Opinions, forecasts and recommendations are offered by individuals and do not represent official GFOA policy positions. Nothing herein should be construed as a specific recommendation to buy or sell a financial security.

Government Finance Officers Association of the United States and Canada
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