Cash flow forecasting key to treasurers

While there may be differences between treasury at a big city council and a much smaller borough, especially the opportunity to achieve good yields, Belinda White writes that detailed cash forecasting remains critical.

Cash flow forecasting is a crucial element to any treasury management function, it doesn’t matter what size your organisation is, or what sector you operate in. It is the foundation to planning and organising your funds in order to make the best use of them while ensuring liquidity.

Having been responsible for the treasury management function at Birmingham City Council for a number of years, and it being part of my remit at Stevenage Borough Council for the last two, I feel I can properly reflect on the differences between these two organisations at opposite ends of the spectrum in terms of their size, and the primary difference may not be what you expect.

Borrower or lender

There will be one thing immediately obvious to anyone involved in the inter-local authority lending market, which is that Birmingham is predominantly a borrower rather than a lender, whereas Stevenage is often in the market looking to lend to other councils.

However, like all local authorities they both have surplus cash to invest due to day-to-day operational cash flows. Everyone involved in public sector treasury management is aware of the need for the considerations of security, liquidity and yield in our organisations’ investment strategies. So as long as treasury staff are working within the bounds of their approved investment criteria, managing liquidity risk needs to be their key focus.

The primary difference is in the magnitude of cash transactions from day-to-day operations. When you manage cash in a situation where you may have a surplus of £25m one day, a deficit of £15m the next, followed by a swing back to a surplus of £10m, you need an entirely different approach than if the figures are in the tens, or even hundreds of thousands, rather than millions.

At Stevenage it is possible to be much more confident in investing surplus cash, rather than keeping all, or most, cash available for daily liquidity. In part, this is because, in addition to the forecast large daily cash fluctuations, when there is an unexpected (at least as far as treasury staff are concerned) significant payment to be made, the values that can be involved in a behemoth like Birmingham, mean that far more cash has to be kept short to cover such eventualities.

The gatekeeping role for making CHAPS payments often sits within the treasury function, but this doesn’t stop them from needing to be paid. What has to be managed is the cash availability on the day, with the added challenge of investment cut-off times often coming earlier in the day than the notification of additional payments.

Forecasting

It was essential to undertake far more sophisticated and detailed daily cash flow forecasting at Birmingham than I need to produce at Stevenage.

It included everything I had data on: From the scheduled receipts and payments you would expect (grants, council tax and business rates pool receipts, payments out for salaries, precepts and PFI contracts) to what I refer to as the other background cash (transactions that have no set schedule). This included the average level of Faster Payments in each month and any pattern over the days of the week, or weeks of the month, for transactions such as school and academy payroll where the council acted as agent and cash could, and would, come in at any time; plus the trend of right to buy receipts which, more often than not, seemed to come in on a Friday.

At Stevenage, my cash flow forecasting is considerably more simplified, with the exception of this time last year where I think everyone in a treasury role was focussed on the huge changes to regular income streams due to Covid.

Even with Birmingham predominantly being a borrower in order to finance the capital programme, the operational cash cycle resulting from the pattern of grant receipts, in particular, should have made it possible to identify cash that could confidently be invested for longer, but that wasn’t the case.

Instead, while the highly detailed cash flow forecasting gave visibility to the cash inflows and outflows, it couldn’t prevent or protect against the typical value of the daily cash fluctuations or the need to accommodate those large one-off transactions.

Yield sacrifice

There is also a paradox between the targeted minimum level of planned investments (which in theory you will be holding almost permanently and could invest for longer), and the fact that it is your buffer to manage unexpected changes to your cash position, therefore need to keep it accessible.

There were no liquidity crises during my time managing the treasury team at Birmingham, but this was managed by keeping investments very short and thereby significantly sacrificing yield. Without that level of detailed cash forecasting now, I have yet to find myself in a situation at Stevenage where there is a lack of liquidity, and investment yields are far higher.

Belinda White, group accountant – capital and treasury, Stevenage Borough Council.

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