TABLE OF CONTENTS INTRODUCTION TO CASH MANAGEMENT ........................................................................................................... 1 SECTION 1 - CASH FLOW FORECASTING................................................................................................................ 2 WHY UNDERTAKE CASH FLOW FORECASTING? ................................................................................................. 2 HOW DO YOU UNDERTAKE CASH FLOW FORECASTING? ............................................................................... 2 CASH FLOW FORECASTING - CHECKLIST.............................................................................................................. 6 SECTION 2 - COLLECTIONS AND DISBURSEMENTS ........................................................................................... 7 OBJECTIVES IN ACCOUNTS RECEIVABLE/COLLECTIONS MANAGEMENT .................................................... 7 RECOMMENDED STEPS FOR EFFECTIVE ACCOUNTS RECEIVABLE/COLLECTIONS MANAGEMENT ..... 7 COLLECTIONS AND ACCOUNTS RECEIVABLE CHECKLIST ............................................................................ 13 DISBURSEMENTS ...................................................................................................................................................... 14 TOOLS AVAILABLE FOR DISBURSEMENTS ........................................................................................................ 14 SECTION 3 - BANK/INVESTMENT RELATIONS .................................................................................................. 17 ESTABLISHING AN EFFECTIVE BANKING AGREEMENT .................................................................................. 17 TIPS IN ESTABLISHING AN EFFECTIVE BANKING AGREEMENT ................................................................... 17 DEVELOPING AN EFFECTIVE REQUEST FOR PROPOSAL – BANKING SERVICES...................................... 18 TIPS IN PREPARING AN EFFECTIVE REQUEST FOR PROPOSAL FOR BANKING SERVICES .................... 19 TYPICAL CONTENT INCLUDED IN A BANKING RFP......................................................................................... 19 BANKING PROPOSAL – EVALUATION CRITERIA .............................................................................................. 21 GLOSSARY ...................................................................................................................................................................... 22
INTRODUCTION—CASH MANAGEMENT
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nvestment and effective cash management have become an essential part of financial management in the municipal sector due to increasingly tight operating and capital budgets. Municipalities are looking for opportunities to improve cash management and mitigate risk even in a relatively low interest rate environment. A well-managed cash management program and its associated investment portfolio can generate substantial incremental earnings to offset escalating costs.
A SUCCESSFUL CASH MANAGEMENT SYSTEM SHOULD INCLUDE: DOCUMENTATION Successful cash management requires a municipality to fully document its cash management and investment policies & procedures. This ensures informed decision-making and provides a clear understanding of the approved policies governing cash management. These policies & procedures may include investment strategies, accounts receivable & payable policies, tendering policies, etc. Policies ensure that the municipality has a set of clear guidelines for facilitating the execution of the day-to-day activities of the cash management program. The municipality should also set specific objectives which can be used periodically to assess performance.
COMMUNICATION Effective cash management involves all departments and is typically coordinated through Finance. This includes the need to communicate policies & procedures internally (departments) and externally (banks) to promote a clear understanding of what the municipality wants to achieve and how they expect to achieve it.
CONTROL Sound cash management controls allow a municipality to safeguard their assets. Controls, as well as associated roles and responsibilities, must be clearly articulated and communicated to the departments.
CONTINUOUS MONITORING Successful cash management requires a regular review of cash management systems and investment decisions to respond to a changing environment and provide direction for the future.
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SECTION 1 - CASH FLOW FORECASTING ccording to GFOA Cash Flow Forecasting is defined as an estimate of receipts and disbursements during a Forecasting is the ability to calculate, given period. Cash forecasting is distinct from predict, or plan future events or municipal accounting and budgeting in that the forecast is conditions using historical data. A done with the intent to i) measure the organization’s ability successful investment strategy for any to meet needs in light of limited resources with the intention municipality depends on the accuracy to ii) establish the need for any short-term borrowing and to and timeliness of its forecasts. iii) avoid the liquidation of any long-term securities (investments) at an inopportune time. To structure an investment portfolio or make investment decisions, it is necessary to utilize CASHFLOW forecasting.
WHY UNDERTAKE CASH FLOW FORECASTING? Forecasting the dates when receipts exceed payments and conversely when payments exceed receipts leads to investment potential maximization. Through efficient forecasting, municipalities can often generate additional income by maximizing the term of the investment. With limited ability to raise revenues, the investment function has become an increasingly important activity for municipalities. Specifically cash flow forecasting provides municipalities with the following:
Determines when funds are required to cover liabilities and estimates the appropriate dollar value cushion to satisfy unanticipated liabilities Minimizes banking fees and charges Benefits of Cash Flow Forecasting Minimizes the need for short-term borrowing Avoid overdraft costs Opportunity for coordinated spending patterns Mitigate shortfalls and balance Defines liquidity requirements flow of funds Helps estimate the future cash position Manage funds more efficiently Assists in making appropriate investment decisions Maximize investment returns Provides the ability to effectively match investment maturities with anticipated future cash outlays Maximizes potential investment earnings by investing surplus cash while ensuring there is sufficient liquidity to cushion unexpected events A useful tool to increase the return potential on its investments by collecting and investing revenues: As soon as possible For as long as possible In the most suitable instruments available
HOW DO YOU UNDERTAKE CASH FLOW FORECASTING? There are seven steps that are recommended to develop an effective cash flow forecast. Each step is documented in detail below.
1. SET A MATERIALITY THRESHOLD To be effective and balance their administrative requirements against the potential investment opportunity, most municipalities do not track every revenue and expenditure item. Instead, most municipalities prefer to follow an 80/20 rule or some derivation thereof. That is, focus on the major sources and uses of funds that represent 80% of the revenues and expenditures to develop a close approximation of cash flow needs.
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While the 80/20 rule is considered to be a standard practice, the degree of accuracy and the materiality of variances should be set by each municipality. Therefore, the first step is to set a materiality threshold for tracking receipt and disbursement variances to meet the municipality’s needs. In developing forecasts, room for error should be included, as well as the municipality’s tolerance at the corporate level for errors.
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2. IDENTIFY INFORMATION RESOURCES USED IN THE DEVELOPMENT OF A CASH FLOW FORECAST A cash flow forecast can be created using available information. Some of the information provides the orders of magnitude to help identify major revenue and expenditure items. Other data sources will provide the flow of fund information to assist in the development of a cash flow forecast.
3. INCLUDE IN THE ANALYSIS ALL MATERIAL SOURCES OF RECEIPTS AND DISBURSEMENTS Analysis on a municipality-by-municipality basis is needed to identify material sources of receipts and disbursements. The following provides a starting point of the typical revenues and expenditures that municipalities usually include in their cash flow forecasts. Fine tuning of the list of revenues and expenditures will be needed to meet the municipality’s unique circumstances. Taxation of most municipalities in These will also vary depending on whether the municipality Ontario accounts for 50% - 60% of is upper-tier, single-tier or lower-tier. total annual revenues. An additional 20% - 25% of annual receipts are TYPICAL REVENUES levied by the municipality and are Municipal Property Tax forwarded to the province for Education Property Tax education property tax revenues. This Provincial Grants is essentially a flow through and User fees for utility services (water/sewer) should be considered in preparing the User fees for recreation centres, transit, etc. cash flow forecast. Cash, maturities, and short-term investments* *Cash includes currency on hand and demand deposits. *Maturities include all items held in investments, which may become mature during the forecast timeframe. *Short-term investments have low transactions costs, but should be viewed as emergency cash bridges.
TYPICAL EXPENDITURES
Payroll and payroll deduction payments (Income tax deductions, EHT, Canada Pension, EI, OMERS and Employee Benefits ) Provincial education payments Levy payments to upper-tier municipalities (as applicable) Daily accounts payable transactions Capital projects Major contracts for services Debt Repayments
4. ESTABLISH APPROPRIATE LEVEL OF DETAIL FOR FORECASTS IN THE SHORT, MEDIUM AND LONG-TERM
Payroll and payroll deduction payments are easily estimated and are due on regularly scheduled dates. Payroll may be weekly, wage one week and salary the next, or the entire staff may be paid bi-weekly on the same day. This should be included in the cash flow forecasting model. Similarly, Payments for income tax deductions, EHT, Canada Pension and EI are regular and easily forecasted as amounts and dates are known in advance.
A decision is needed on the level of detail required for the cash flow forecast. The following guidelines serve as a general rule of thumb have been used by several municipalities surveyed: A detailed forecast is needed for the next 30 days (provides daily cash flow analysis) Less detailed for fiscal year (typically on a monthly basis) Broad forecast is needed for 5-10 years (includes long-term capital budget)
5. UNDERTAKE HISTORICAL AND FUTURE TREND ANALYSIS A general funding level for anticipated and unanticipated expenditures should be determined by looking at past trends and changes that have occurred that could also impact future forecasts. This will involve looking
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at past years’ cash flow patterns and making assumptions about the current year. This analysis is needed not only on a month–by-month basis, but also on a weekly and daily basis for short-term cash flow forecasting. There are a number of factors that impact cash flow analysis including, but not limited to: Property installment deadlines Water/sewer billing cycles Provincial grants/subsidy installment schedules The use of historical data to measure activity of a cyclical nature for both receipts and disbursements is recommended. A well-established base of financial activity predicated on historical data better enables the forecaster to anticipate disbursements and receipts. This activity should be verified by the operating department for its likely recurrence. Historical data will give insight into what can be expected in the future. It is also important to focus on the future. A review of changes in policies impacting cash flows and investments is required. Policies that may impact future cash flows include: User fee policies and rates Contributions to reserves Debt policies Tax policies, rates and payment dates Development charge policies Water/sewer rate policies, rates and payment dates Reserve policies
Historical trends are important. It is generally accepted that analysis of 2-3 years is appropriate to avoid anomalies associated with specific one-time events (e.g. large retroactive provincial payments, specific capital projects, etc.).
In addition, capital financing plans will impact the availability of cash for investment purposes, as well as the need and source of cash to support financing plans.
CONSIDERATIONS IN UNDERTAKING TREND ANALYSIS The following provides some general payment trends experienced in municipalities that should be considered in in preparing a municipal cash flow forecast.
Consider historical timing of property tax payments and the method by which payments are made. Trends indicate that the vast majority of tax payments are made on or immediately prior to the due dates. Plotting the due dates and installment amounts become the first entries on the cash flow spreadsheet. Identify property tax installment/non-installment months. Installment months are much more revenue rich than non-payment months and the bulk of those remittances are made near the end of those months. Adjust for changing trends and refine spreadsheet input parameters to ensure reliable future estimates. Consideration should also be given to how tax payments are made using various options, *For example, payments made as each may have a different payment pattern that through mortgages are almost will impact the cash flow analysis - particularly the guaranteed to be paid on or before the 30 day analysis. Types of payments include: due dates. Some banks are in the Over the counter payments practice of paying multiple Payments at banks installments in one payment which will Pre-authorized payments impact cash flows. Bank payments through mortgages* Lockboxes
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User Fees - Understand trends in payments for user fees. Typically receipt deposits are higher on Mondays than any other day of the week, which will impact the short-term forecasting. Capital Projects - While capital projects may include payment schedules and milestone payments, the progress of the project may not always reflect the anticipated schedule. Project managers know the project progress and can offer the investor required information with respect to changes in the project payment schedule. Identify Changes in Pricing – For current and mid to long-term forecasting, overall expenditure and revenue patterns may be the same, but the amounts may vary based on increases in costs such as salary negotiations, utility price increases, property tax increases, etc.
*Utility operations, recreation centres and transit operations are examples of municipal functions that may make their own bank deposits. Daily banking records can show the investor when deposits are missing or indicate material differences between the actual deposit and the expected deposit. Having contact people in these areas will assist the investor in reconciling these differences and allow the availability of maximum investment dollars.
6. CONSULT WITH DEPARTMENTS Accurate cash flow forecasting must be done with input from departments to fully understand revenue and expenditure cash flows. This will require input from all operating departments to develop reasonable expectations of planned expenditures and revenues.
7. DEVELOP A FINANCIAL MODEL TO TRACK CASH FLOWS A computer spreadsheet is needed to track cash flows over time and predict future cash flows. The appropriate level of complexity in the spreadsheet should adequately project the municipal cash position with limited daily effort. As this is a forecast tool, municipalities should consider this a combination of art and science. Assumptions should be tracked and updated on a regular basis to reflect the municipality’s best estimate of what the cash flows will be on an ongoing basis. Developing a cash flow spreadsheet initially will take a substantial investment of time. However, updating and refining the cash flow forecasts thereafter becomes routine and will consume only a limited amount of time. Cash flow projections must constantly be modified as new information is gathered. Tracking the timing of planned-versus-actual revenues and expenditures is needed. This will provide useful information to investigate major variances.
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CASH FLOW FORECASTING - CHECKLIST The following provides a summary checklist that may assist municipal managers to ensure that the critical elements in cash flow forecasting are completed. Questions
Not Applicable
Yes
Does the municipality prepare a cash flow analysis? Does the municipality update the analysis at least monthly? Is the cash flow analysis based on historical information? Is the cash flow analysis based on future information? Are adjustments made to the cash flow analysis for unanticipated events (causing increase/decrease in revenues/expenditures)? Does the municipality compare cash flow analysis with actual results of operations? Does the municipality perform an evaluation of material variances? Is the cash flow analysis used for investment purposes? Does the municipality know, on a monthly basis, the sources and estimated amounts of money anticipated to be received? Does the municipality know, on a monthly basis, approximately how much money will be needed to pay bills and payroll?
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SECTION 2 - COLLECTIONS AND DISBURSEMENTS eeping a tight rein on bank balances has become a principle staple in cash management. The collection and disbursement elements are critical keys to success in achieving maximum cash availability and meeting cash and investment needs.
OBJECTIVES IN ACCOUNTS RECEIVABLE/COLLECTIONS MANAGEMENT Effective management of accounts receivable and collections allows a municipality to achieve strategic advantages through improvements in customer service, cash management, reductions in costs and increased investment opportunities. The following summarizes some key objectives in accounts receivable and collections management: To maximize cash availability for investment purposes To provide good customer service To recognize receivables promptly and vigorously The primary objective of accounts pursue their collection receivable is to collect monies due To treat debtors fairly and equitably and to assist in meeting cash flow To implement mechanisms to encourage prompt requirements. An effective accounts payment (interest on overdue accounts, discounts receivable process can assist in for early payments) achieving the desired cash flow To manage risk of the receivables portfolio outcome through the timely collection To classify, record and report accurately and of outstanding debts. promptly all receivables transactions in accordance
with government accounting and financial reporting standards To sustain efficient and effective collection practices and systems To take action on a timely basis with respect to any write-off, remission, forgiveness, or waiver of debts
RECOMMENDED STEPS FOR EFFECTIVE ACCOUNTS RECEIVABLE/COLLECTIONS MANAGEMENT 1. DEVELOP ACCOUNTS RECEIVABLE/COLLECTIONS POLICIES Accounts receivable and collections policies should be outlined by the municipality to establish: Interest rate/penalty charges Timing of when charges will apply and how they will The focus of this section is to identify be calculated practices & policies that will assist Terms of payment ( e.g. net 30 days, 60 days, 90 municipalities in maximizing cash days) availability. The recommended Write-off authorities and limits approach is to proactively manage Collection procedures for delinquent accounts receivables and collections, as a Interest charged on every type of receivable passive approach to managing Fairness and equity amongst like debtors receivables reduces the timely access Property Tax Arrears – Tax Registration to funds. *These policies should be based on clearly defined objectives.
2. DEVELOP CORPORATE WIDE POLICIES WHERE POSSIBLE/PRACTICAL Collection activities and policies should be standardized across the municipality. Standardization ensures that like debtors are treated fairly. For example, a municipality should attempt to charge the same interest rate for all its receivables.
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3. SEEK COUNCIL APPROVAL OF ALL ACCOUNTS RECEIVABLE/COLLECTION POLICIES Once developed, staff should seek to obtain approval by Council to ensure that staff is acting in accordance with Council defined policy. This avoids confusion and increases the likelihood of consistent treatment.
4. REVIEW AND UPDATE POLICIES AS REQUIRED It is important to review and update policies regularly to ensure effective cash management practices are followed.
5. ESTABLISH PRUDENT COLLECTION STRATEGIES AND INTERNAL PROCESSES A review of annual write-offs will indicate the level of resources that should be used to focus on receivables. There may be opportunities to increase the effectiveness of collections by coordinating collections between departments. No matter where money is deposited, the main objective is to get money into investments with better risk / reward characteristics as soon as possible. The best way to do this is to establish written receipts and deposit procedures and review them periodically. As recommended by GFOA, all accounts receivable should be recorded in a manner to permit an analysis of the aging of such receivables (e.g., 180 days and over $25).
6. DEVELOP STRONG INTERNAL CONTROLS According to GFOA recommended practice management should establish standard internal controls that are properly documented and followed uniformly by affected department(s) generating the receivable, receipting the payment, and performing collection activities on delinquent accounts. This should include the following: Segregation of duties – authorization, recordation and custodian functions should be performed by different personnel or mitigating procedures should be in place in cases where there is insufficient staff. Reconciliation to the general ledger and other supporting accounting ledgers should be performed in a timely manner for receivable balances and subsidiary ledgers. Automated system resources should be utilized where practical to provide better support towards processing and reconciliation. Upon any suspicion of fraud, management should be notified. Management should then notify the appropriate personnel (e.g., internal audit, law enforcement) in a timely manner for further investigation. If there is any suspicion regarding non-compliance with internal control directives, management will notify the appropriate personnel (e.g., internal audit) for further review.
7. DEVELOP APPROPRIATE PERFORMANCE MEASURES Performance measurements can be established to gauge the efficiency and effectiveness of the procedures. e.g. percentage of accounts receivable collected.
8. EXPLORE, ANALYZE AND IMPLEMENT TOOLS TO EXPEDITE CASH COLLECTION AS APPROPRIATE Effective cash management involves speeding up the billing and collection process in order to more expediently move cash into the municipality. If cash collection can be improved, there is an opportunity to increase the cash inflow and enhance the potential for greater earnings on investments. There are a number
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of tools and strategies employed by municipalities to ensure an efficient and effective accounts receivable/collection practice by meeting one or a combination of the following goals: Increased levels of customer service Reductions in costs Increased investment opportunities
TOOLS AVAILABLE Municipalities are finding that payment of accounts outstanding is likely to be quicker where a number of payment alternatives are made available to customers.
PRE-AUTHORIZED PAYMENTS The majority of municipalities surveyed have implemented pre-authorized payments for property taxes. Benefits include: Better customer service Receivables/Collections Tools Easier on a property owner’s budget because Pre-authorized payments payments are spread over many months, rather than Direct debit four large installments Integrated Voice Response No special fees / service charges to enroll in the plan Lockboxes Save the cost of postage, cheques and envelopes Electronic Funds Transfers Avoid late payment charges and eliminate the worry Changing Billing Cycles about missed due dates, postal disruptions, etc. Using penalties or offering Reduced processing costs cash discounts Improved inflow of funds by reducing % of late Credit Cards payments
DIRECT DEBIT This involves authorization for the transfer of funds from the purchaser’s bank account, resulting in reduced processing costs. Direct debit has been implemented in numerous municipalities across Ontario.
INTEGRATED VOICE RESPONSE This is a system which combines use of human operators and a computer-based system that allows customers to make payments over the phone, generally by credit card. This system has been proven highly successful where a large number of payments are processed regularly.
LOCKBOXES Lockbox service providers (either banks or other vendors) deploy equipment that converts manual tasks into automated functions. These tasks can include mail opening, reading of cheques, reading of remittances into automated functions, etc. By using high-volume equipment to obtain large economies of scale from multiple clients (both municipal and privatesector clients), lockbox service providers are able to process transactions at a low unit cost.
A lockbox is a banking collection service which utilizes a unique post office box where payments are sent to be: Sorted Read by scanning equipment Posted Deposited immediately to the municipality’s account
Lockboxes expedite access to cash by allowing users to send their cheques to a post office box. In these cases, the bank typically collects the cheques and deposits them directly into the municipality’s account,
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making the money available more quickly than through traditional mail-in practices. Before adopting this approach, the cost versus the benefits must be assessed.
Advantages of Lockbox Services
Using a lockbox for the collection of property taxes and water bills is one of the best remedies to eliminate the concern that deposits may not be being made on a timely basis.
Improves cash flow by reducing processing time between mail deliveries and deposit of payments. Effective method for large volume payments made to the municipality such as property tax payments, water/sewer payments, and utilities. Increases payment and posting accuracy. Increases staff productivity by freeing personnel from the labour intensive process of manually handling mail and payments. Municipal billings and cash flows are often cyclical, causing problems with cash management operation staffing levels. Reduces the inherent risk associated with handling cash, and increases the availability of funds for investment. While there are many advantages to using a lockbox, there is a cost for this service. Municipalities GFOA recommends municipalities therefore should evaluate the benefits and costs of evaluate opportunities to use utilizing lockbox services to determine if advantages electronic collections for the following can be gained in the areas of accuracy, cash flow areas: and efficiency. Evaluations should include: Internet transactions Analysis of the existing workflow from Automated phone receiving mail to depositing payments and systems/Interactive Voice posting receivables Response Additional time necessary to complete the Grant payments process internally which slows the flow of Repetitive collections (property tax, water/sewer) funds to the municipality License payments Staffing requirements Other recurring receipts Security of the process Employee accuracy Capital requirements
ELECTRONIC FUNDS TRANSFER Electronic Funds Transfer (EFT) provides quicker, less costly, and more secure means of moving funds than cheques or other instruments that have to move through the traditional postal system. Receiving major revenues via EFT will cut down on the collection and deposit time. GFOA also identifies the following advantages and disadvantages associated with electronic collections: Disadvantages
Advantages
Reduced time for bill payment by customers Reduced costs for envelopes and postage for customers 24-hour access to payment (Web/ telephone) by customers Instant acknowledgement of payment (Web) by customers Expedited payments Reduced paperwork Lower risk of non-payment Reduced return cheque processing cost Accelerated payments and availability of funds
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Electronic payment systems may be poorly or not at all integrated with accounts receivable systems Internal controls emphasis moves manual posting of receipts to data processing control Some banks do not offer the level of sophisticated services necessary for electronic receipts
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Cost/benefit of electronic payments should consider: Bank fees
Experience with fraudulent or returned cheques Supply costs Administrative and processing costs Mail fees Impact on availability of funds and interest earnings Information technology resources and capabilities of the jurisdiction
According to GFOA, municipalities should implement the following safeguards in electronic fund transfers:
Strong internal and data processing controls on all programs and data files associated with banking information of vendors and employees to ensure privacy and prevent unauthorized use Network security to protect data files from internal and external threats Appropriate segregation of duties Written agreements establishing procedures, risk exposure, and indemnification issues should be executed with banks and third party providers Dual controls for the authorization of repetitive and non-repetitive transactions Establishment of dollar limits for authorized personnel Establishment and use of passwords for authorized personnel to initiate transactions Call-back procedures to verify transactions Confirmations of transactions from financial institutions Authorization agreement to allow automatic clearing house deposits should be executed with each vendor and employee Establishment and use of adequate controls against unauthorized automatic clearing house debits, such as blocks and filters Use of separate accounts for automatic clearing house debit activity where volume and type of payment warrant Pre-noting or testing automatic clearing house transactions to vendors and employees Use of an automatic clearing house format that supports the transmission of the remittance advice Implementation and periodic review of internal controls that address access control, confidentiality of data, integrity of data, and other information security issues as appropriate
CHANGING BILLING CYCLES By changing billing cycles for various user charges such as property taxes or water/sewer bills, there may be an opportunity to improve the flow of funds to the municipality. Also, internal processes should be evaluated in terms of how long it takes from the time a meter reading is done to the time it takes to bill the user. By shortening the time period between reading water meters and mailing the billings, receipt of funds can be expedited. This would require a review of internal procedures and practices. The analysis should address whether the period between reading and billing is reasonable. If not, there may be opportunities to improve the timing of the flow of funds to the municipality. It is recommended that a cost analysis from the municipality’s perspective be undertaken to determine most appropriate reading/billing cycle. Customer preferences should also be considered. Changes to billing/ reading cycle may not only increase customer satisfaction but also increase interest earnings for municipality (net of additional expenses). Moving forward, Council should approve a policy to establish reading/billing cycle.
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the the the the
There are further opportunities to review the actual cycle of billing for water/sewer, as well as property taxes. The shorter the cycle, the quicker the municipality receives the funds. Municipalities should undertake the following analysis: Review the billing cycles to determine reasonable time periods between meter readings and billings Review the frequency of billings (e.g., bill customers quarterly or bi-monthly instead of semi-annually) Review this area carefully to determine if increasing the billing frequencies is cost effective. This will require a cost benefit analysis to compare the cost of additional reads and billings to increased interest earnings by receiving funds earlier. Review current office staffing level/duties to determine if water customers could be billed more frequently. (e.g., if the customers are billed semi-annually, it may be more beneficial to bill quarterly) Review payroll costs and bill processing costs to determine if it is cost effective to bill customers quarterly Review timing of deposits for this department
USING PENALTIES OR OFFERING CASH DISCOUNTS In order to encourage payment, interest charges are often used on overdue accounts. In addition, while not as common a practice, some municipalities offer cash discounts for early payments. Examples include early registration for recreation programs and early payment of water/sewer accounts.
CREDIT CARDS Credit card acceptance as a payment method has become virtually universal within the private sector and is gradually being accepted by municipalities for payment of some types of transactions. There are advantages and disadvantages to accepting credit card which municipalities need to weigh when deciding whether to accept this form of payment. GFOA recommends municipalities evaluate whether acceptance of credit cards as a payment option is reasonable and appropriate for the type of charge or fee being paid and the customer service level desired.
Merchant discount fees – costs charged by the credit card issuer per transaction typically vary Benefits of Accepting Credit between one and three percent of the value of the transaction. Municipalities should negotiate the Cards: lowest possible fee to minimize the financial impact Increased certainty of collection to the municipality Reduced return cheque When negotiating fees, consolidate all potential users processing costs to get the best price Accelerated payments and the Types of payment – acceptance of credit cards as a availability of funds method of payment for mandatory charges many not Improved audit trail significantly increase the amount of revenues as a Reduced cashiering costs result of paying the merchant discount fee. Enhanced customer Acceptance of credit cards as a method of payment convenience for discretionary charges and absorption or payment of related merchant discount fees may facilitate collection of such charges Administrative costs – such as equipment and the associated personnel necessary to process credit card transactions
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COLLECTIONS AND ACCOUNTS RECEIVABLE CHECKLIST Type Policies Policies Policies
Policies
Not Applicable
Questions Are policies in place to safeguard municipal assets by following active collections procedures? Are they appropriate? Does your municipality have policies in place to minimize write-offs and the circumstances upon which write-offs are undertaken? Does the municipality have a policy to address delinquent accounts? If so, is it appropriate? Does your municipality have policies that identify interest / penalty charges and rates to be applied to overdue accounts? Property Taxes? Water / Sewer? Other?
Type Procedures / Practices Procedures / Practices Systems Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices Procedures / Practices
Yes No
Yes
No
Questions Do procedures exist to prepare and send billings as soon after the sale of goods or performance of services as possible? Have procedures been documented to collect monies due within the established payment terms? Are there appropriate accounts receivables tracking systems? Are all major departments/activities depositing receipts directly into municipality’s bank account? For major departments/activities that are not depositing receipts directly into the municipality’s bank account, are the receipts being transferred to the bank account in a timely manner? Does the municipality prepare an analysis of the municipality’s chequing account showing the length of time between the receipt of moneys and their deposit? Are receipts being deposited daily? Is there a formal organizational chart defining responsibilities of preparing bills, recording their payment, collecting the accounts and follow-up of accounts not paid? Are the following duties generally performed by different people? Billing, collecting, cash application of accounts receivable? Writing-off or adjusting to accounts receivable? Are subsidiary accounts reconciled at least monthly with the general ledger control account? Is an aging schedule prepared monthly and is it reviewed by a responsible manager? Are statements of aged accounts mailed at least once a month? Has an allowance account been established for doubtful accounts to reflect the amount of the municipality’s receivables? Are accounts written off the financial records when all collection procedures have been exhausted without success?
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COLLECTIONS AND ACCOUNTS RECEIVABLE CHECKLIST Type
Not Applicable
Questions
Tools Are major revenues collected by means of electronic funds transfer (EFT)? Tools Does the municipality use a lockbox for the collection of receipts? Systems Are there appropriate accounts receivables tracking systems?
Yes No
DISBURSEMENTS Ideally, cash should be disbursed only when absolutely required and at the last possible moment. While this practice should be carried out in a manner that avoids fines for late payment and minimizes poor vendor relations, efforts should be made to hold or delay payments. Effective disbursements require that accounts payable be well managed. The timing of disbursements is an important decision that has implications for the liquidity position of the municipality.
Disbursements represent the outflow of funds in the form of cheques issued and payments made. Delaying cash outflows enables an organization to optimize earnings on available funds.
Principles in effective cash disbursement include: Ensure that the liquidity requirements of the municipality are met by the portfolio Ensure that the municipality makes every effort to take applicable discounts and hold payments until they are due Ensure that funds are available for the maximum amount of time to generate additional earnings Ensure that penalties are avoided by paying invoices on a timely basis Reduce amount of idle cash balances Maintain satisfactory relationships with vendors Reduce net cost of processing disbursements
TOOLS AVAILABLE FOR DISBURSEMENTS ELECTRONIC FUNDS TRANSFER Electronic funds transfer can be used to delay disbursements in the same way it can be used to speed up collections. This can maximize the time for which money can be used by the municipality by reducing float time. This provides the ability to set a definite timeframe upon which GFOA recommends municipalities funds can be maintained in investments, rather than having evaluate opportunities to make and to rely on estimates on when payments would clear through receive electronic fund payments in cheques. the following areas: Payroll For example, by transferring debt service funds on the day of Expense reimbursements payment, the municipality has use of the funds as long as Vendor payments possible. This provides for immediate transfer of funds which
Intergovernmental payment allows cash managers to retain funds longer and still make major payments, like debt service, on the due date. This ability requires additional necessary safeguards. EFT can be 'repetitive' (i.e. debt service, tax payments, etc.) or non-repetitive for unique payments (i.e. purchase of an investment).
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PURCHASING CARD PROGRAMS The purpose of a purchasing card program is to provide an efficient, cost effective method of purchasing and paying for small dollar and high volume, repetitive purchases. This program is designed as an alternative to the traditional purchasing process and can result in a significant reduction in the volume of purchase orders, invoices and cheques processed. It is important that municipalities be aware of the risks related to the use of purchasing cards. Municipalities should develop plans and use a competitive process to select a purchasing card provider in order to limit these risks.
DIRECT DEPOSIT OF PAYROLLS CAN:
Purchasing / Procurement Card Benefits: Purchasing without purchase orders Expansion of merchants list Reduction in paperwork Cost effective method for small dollar repetitive purchases Reduction in purchase orders, invoices and cheques processed Expedition of delivery of goods Increased management information on purchasing histories
Reduce costs of cheque processing including canceled cheque storage Reduce account reconciliation service costs and staff time used to reconcile payroll bank account Reduce occurrence of lost/stolen cheques Provide convenient arrangements and access for absent employees or employees working shifts at other than regular business hours
DISBURSEMENTS CHECKLIST Questions
Not Applicable
Yes No
Do you take advantage of vendor discounts when offered? Do you have a system in place for processing invoices that takes advantage of any discounts offered? Do you delay the payment of bills not offering discounts without incurring a late charge? Do you delay the payment of payrolls by processing payroll cheques bi-weekly instead of weekly? Do you offer direct deposit of payroll cheques to your employees? Are you paying any bills by electronic funds transfer (EFT)?
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MAXIMIZING INTEREST EARNINGS CHECKLIST Not Applicable
Questions
Yes
No
Yes
No
Do you and any major departments have moneys on deposit in non-interest bearing accounts? Do you use more chequing accounts than you need? Do you use a consolidated chequing account? Do you deposit funds to interest-bearing accounts first then disburse such funds as needed from a consolidated chequing account? Do you use more savings accounts than you need? Do you know what interest rates you are earning on your bank accounts? Do you periodically compare interest rates being offered by other financial institutions to rates currently earned on all your bank accounts? Do your comparisons show you are getting the best possible rate? Do you invest idle cash balances for as long as possible? Are the type of investments you are using providing the best rates? Have you recently talked to your bank representative to learn what services may be available?
MINIMIZING BANK FEES Questions
Not Applicable
Have you requested information from other banks about their banking services and costs? Are you currently paying for bank services? Has your bank given you monthly account analysis reports showing: the summary and detailed chequing account activity for all your accounts; the cost of banking services consumed by you; and the compensating balances required to be on deposit to cover the cost of banking services? Do you know the compensating balance required by your bank to earn equivalent “charges” it incurs to provide to your local government? If so, do you target this balance to remain on deposit to cover the cost of bank services and invest the remaining unneeded balance until funds are needed?
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B
SECTION 3 - BANK/INVESTMENT RELATIONS anking and investment relations are key elements of effective cash management. Municipalities have a responsibility to solicit banking services from financial institutions that will provide timely, efficient and effective services. It is important to develop effective agreements with external service providers including: Banks/Financial Institutions External investments firms The One Investment Program
ESTABLISHING AN EFFECTIVE BANKING AGREEMENT A banking agreement provides a benchmark upon which services are clearly outlined and upon which performance can be monitored. By establishing an effective banking agreement, the following objectives will be met: Maximizing earnings through increased yields Maximizing earnings through improved timeliness of the availability of funds Receiving additional or improved services at better price points Increasing internal efficiency within the municipality Capitalizing on customer service opportunities Effectively implementing technological solutions
TIPS IN ESTABLISHING AN EFFECTIVE BANKING AGREEMENT COMPETITION IS GOOD Municipalities tend to receive better, more creative and cost competitive banking service offerings when the services are tendered out on a regular basis. There are costs involved in changing banking institutions and therefore cost / benefit analysis is required in defining how often the tendering process should be initiated. In addition to improving the overall agreement, tendering banking services also avoids perceptions of unfair competition and ensures that the municipality has an opportunity to evaluate new services available. The process should include a request for proposal and should cover all required services, as well as optional services. Further detail on preparing a request for proposal has been addressed later in the manual.
ESTABLISH A REASONABLE LENGTH OF CONTRACT Standard practice across Ontario municipalities is to review and re-tender banking agreements every 3-5 years. This provides a sufficient term to ensure that enough banks will be willing to invest the time to prepare and submit a proposal. In addition, a 3-5 year contract (as opposed to a 1-2 year contract) minimizes the time to address the municipality’s administrative requirements of changing service providers. Any more than 3-5 years may compromise the municipality’s ability to take advantage of new products, technology and service offerings, as well as changes in the market that may impact the overall terms of the contract.
MONITOR CONTRACT REGULARLY Once a banking relationship is established, the municipality has a continuing responsibility to monitor the service levels and related costs. This requires timely statement balancing and attention to the account analysis.
LOOK FOR ECONOMIES OF SCALE Typically, municipalities receive better banking terms with larger contracts. As such, it is generally accepted that to benefit from economies of scale and reduce administrative costs, it is preferable to enter into an agreement with one bank, rather than multiple agreements. Based on research undertaken, multiple
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agreements tend to exist in municipalities that have recently amalgamated. Upon contract expiry, a request for proposal is then typically prepared for the consolidated services.
MAINTAIN THE RIGHT TO INVEST OUTSIDE THE BANK Banking and investments are not intrinsically tied. A banking contract can include a bid rate on investments, but, the municipality should reserve the right to invest outside the bank.
IDENTIFY AND CONSIDER HIDDEN COSTS IN THE EVALUATION PROCESS Due to the way some banks structure their agreements, it is a common misconception that the banking services are free. However, experience has shown that there is no such thing as free banking. Regardless of whether the municipality is paying for banking services by fees or compensating balance, there is a cost to banking and that should be considered when making investment decisions. For example, fees may be paid through reduction of investment rates. In addition, some banking contracts require a minimum monthly balance in order to waive/reduce fees. This needs to be factored into the analysis of banking services (known as a compensating balance payment plan) as well as other investment opportunities for surplus cash.
INVEST TIME IN PREPARATION OF RFP The key to obtaining efficient and effective services is the issuance of a clear and concise request for proposal (RFP) that includes all possible services and products that the municipality is interested in obtaining.
DEVELOPING AN EFFECTIVE REQUEST FOR PROPOSAL – BANKING SERVICES PRELIMINARY RESEARCH Before issuing an RFP, the municipality must first undertake some preliminary research to identify: What are the key objectives for the banking agreement? What services are needed? What services are available? What services fit the municipality’s needs? What are the costs/benefits of the services? What flexibility is needed in the contract and services? Is there any reason why banking services would be segregated among more than one institution?
CONSULTING KEY STAFF Consultation with other departments is key to ensuring that the proposal addresses specific areas of need. While Finance typically plays the lead, other departments must be consulted prior to issuing an RFP and undertaking the evaluation. Departments should be consulted to identify any specific needs from a collections and disbursement perspective. Information Technology should be consulted to ensure compatibility with existing systems and to ensure that security features are addressed. Information Technology will also play a role in preparing the information technology aspects of the proposal. Purchasing also plays a key role in the issuance of any RFP. Typically Purchasing plays the role of gatekeeper to: Ensure RFP is in standard format and includes required clauses Ensure that the purchasing policy is being adhered to Ensure that the rules of engagement (built into purchasing bylaw) are set out in the document Ensure confidentiality of proponent’s submissions Receive and open proposals
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TIPS IN PREPARING AN EFFECTIVE REQUEST FOR PROPOSAL FOR BANKING SERVICES IDENTIFY THE MUNICIPALITY’S KEY OBJECTIVES It is helpful to provide general statements outlining the general terms of the agreement and clarify what the municipality expects to receive. Establish the municipality’s right to invest in other instruments, outside the bank’s portfolio. Incorporate recent technological developments in banking to improve efficiency and reduce costs. Provide innovative solutions for the municipality’s consideration.
Example of Municipal Objectives Create an efficient and cost effective banking services arrangement to include: Collection of funds Disbursement services Safekeeping of securities
DEFINE CORE AND OPTIONAL SERVICES It is important to define core and optional services and provide an opportunity to price accordingly (separate between core and optional, as well as bundled service). This will allow the municipality to make “apples-to-apples” comparisons as well as provide an opportunity to pick and choose which services ultimately to include in the agreement and finally an opportunity for reduced costs through bundling of services.
PROVIDE AN OPPoRTUNITY FOR FINE-TUNING The RFP should provide the ability to “fine tune” the contract and terms. However, this must be clearly articulated in the proposal and in accordance with the rules set out by purchasing.
ENCOURAGE INNOVATION The RFP should provide an opportunity for innovation at the same time as ensuring the standard proposal requirements are priced to allow “apples-to-apples” comparison and evaluation.
PROVIDE SUFFICIENT BACKGROUND INFORMATION FOR PROPONENTS TO PREPARE PROPOSAL In order for proponents to respond to the RFP, sufficient financial and bank activity information must be provided by the municipality. The RFP document should include a narrative section describing the bank accounts and safekeeping account structure needed to carry on business. This should include an account description, deposits, withdrawal activity, EFTs, transfer activity, etc. The municipality will also need to provide an overview of its financial computer systems (payroll and point-of-sale systems) in sufficient detail for the proponent to address compatibility. Financial information (schedule) should be provided by the municipality in the following areas: A list of the types of accounts A description of the activity and a historical average daily balance, provided on a monthly basis Activity levels – e.g. average # of cheques cleared, # of cheques returned, # of stop payments, debit and credit activity, etc. Coin room activity - # by month and by denomination Pre-authorized payment – quantity and amount by month Payroll debit and credit activity (direct deposit) – quantity, # of employees, amount How reserve funds are managed and reserve/trust fund balances Deposit source and locations Credit and debit card activity
TYPICAL CONTENT INCLUDED IN A BANKING RFP The following provides information requests that are typically included in the RFP to make an informed and comprehensive proposal.
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Term of Contract – this should specify the term of the contract and the starting date. Proponent Qualifications – years of experience with similar clients (in scope and complexity). Location of Branches - requirement to have a facility within x kms of the municipal office that offers a full range of services. Daily Courier – description of daily courier/delivery services between branch and municipal office for bank statements, cashed cheques/deposit slips, debit/credit memos, chargebacks. Depository Requirements Deposits at head office and satellite offices Online/Telephone banking payments Online reports Debit and credit cards Property tax payments Interactive voice recognition payments and Acceptance of payment on account (APA) internet payments Electronic data interchange (EDI) Night deposits Pre-authorized payments (PAP) Deposit slips and other bank supplies Disbursement Requirements Cheques – handling, management & timing Cheque reconciliation service Treasury Requirements Bank statements Electronic balance and transaction reporting Electronic funds transfer (EFT)
Direct payroll deposit Wire transfers, drafts, certified cheques
Borrowing/Line of Credit Letter of credit Investment safekeeping
Transitional Arrangements The RFP should include a requirement for the proponent to describe their ability and willingness to work with the municipality to ensure a smooth and efficient conversion from the existing contract to the new contract. The proposal may seek clarification from the proponent as to their willingness to reimburse the municipality for out of pocket expenses, availability of resources for the transfer and commitment to ensure that the transition does not create disruptions in service. Service Charges The RFP should ensure that the pricing provided for all key services be done separately, as well as providing an “all-inclusive” price based on the RFP requirement. A standard fee schedule may be of assistance in making “apples-to-apples” comparisons. Interest Rate The RFP should require the proponent to provide a complete interest rate schedule including, but not limited to the following: Interest Paid on: Interest Charged on: Consolidated balances of the operating Daily consolidated overdraft balances of the account operating accounts Trust and Reserve Fund account Daily overdraft balances of each of the Trust & Reserve Fund accounts Standby letter of credit
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Customer Service The RFP should require the proponent to define specific contacts, communications, problem resolution procedures, technical support for hardware and software. Service Enhancements The RFP should also provide a separate section where the proponent can identify where the bank might be able to offer more cost effective alternatives that do not presently exist with the municipality’s current practices. IT Compatibility It is essential to stress the importance of compatibility with existing service and if not, proponent’s transition strategy and cost.
BANKING PROPOSAL – EVALUATION CRITERIA The evaluation criteria should be customized to align with the municipality’s goals, objectives and strategic priorities. The following provides a consolidated list of criteria used by some municipalities to evaluate bank RFPs. Note that this information has been consolidated, based on information provided by several Ontario municipalities. Revenue Income Interest paid on daily balances in bank accounts Cost of Banking Services Depository requirements Disbursement requirements Depository and Disbursement Service Location of main branch to service municipality’s accounts Satellite branch locations and night depository Bank accounts structure Bank statements Direct payroll deposit
Offset by interest charged on overdraft balances
Treasury requirements Cost of transitional support
Receipt and settlement of property tax payments Debit and credit card services Cheque reconciliation service Transitional support for transfer of accounts
Customer Service, Treasury and Other Services Customer service and dependability Electronic balance and transaction reporting Electronic funds transfers Investments safekeeping and reporting Bank courier service to Municipal Hall
Cost effective banking service enhancements Computer environment Transitional support for transfer of accounts
Community Investment Direct financial investment provided to the municipality Direct financial investment provided to other public agencies in the community Experience with similar clients – not just bank but the team being assigned to the municipality
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GLOSSARY Cash Flow – refers to the movement of money in to and out of an organization over a period of time. This is not static; at some points cash flowing into the organization may be higher than the cash flowing out or viseversa. This measures the available cash in the “bank”, not the surplus or deficit in the income statement. RFP—request for proposal. Lockbox - lockbox is a banking collection service which utilizes a unique post office box and extended operational hours. Payments are sorted, read by scanning equipment and posted, then deposited immediately. Electronic Fund Transfers – this provides for the immediate transfer of funds which allows the cash manager to retain funds longer and still make major payments, like debt service, on the due date. Positive Cash Flow – if the cash coming in to the municipality is greater than the cash going out of the municipality, the municipality has a positive cash flow. This usually means that there is a positive balance in the bank. In this case, it is important to estimate how long and the amount of excess cash there is to make some investment decisions. Negative Cash Flow – if the cash coming in to the municipality is less than the cash going out of the municipality, the municipality has a negative cash flow. This can lead to a negative bank balance, or a balance below the minimum levels set by the municipality. An analysis of cash flow forecasts is needed to understand the reason for the negative cash balance and to identify ways to mitigate negative cash flows. A negative cash flow can be caused by, for example, high property tax arrears, accounts receivable practices …. In these cases, it is important for the municipality to reverse the negative cash flow or look at reducing investments until the situation improves. GFOA—Government Financial Officers Association.
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Jason Hagan, Program Manager, LAS 416.971.9856 ext. 320 Fax: 416.971.6191
[email protected]
Tom Bradbury, Policy Advisor, MFOA 905.304.4429 Alt: 905.973.2898
[email protected]
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