Daily Cash & Liquidity Management

Immersive Example

Effective cash management aligns broad financial policy with routine operational needs. The goal is to meet regular obligations—like bills, payroll, or vendors—without scrambling for last-minute financing. Over time, diligent liquidity practices also build public trust and support healthy credit ratings.

Overarching Goals

Municipal finance teams balance several interrelated goals when managing daily cash and liquidity:

• Maintain enough liquidity to comfortably handle day-to-day transactions.
• Seek modest returns from short-term investments, adhering to legal and policy constraints.
• Guard against fraud and errors, upholding strong banking relationships and internal controls.

This balancing act ensures that while the city remains flexible enough to meet immediate obligations, it also leverages the cash it does have in prudent, measured ways.

Cash Flow Forecasting

Accurate forecasting begins with understanding expected inflows—such as tax receipts and fees— and outflows—like payroll, debt service, and routine expenses. This can be refined through tools like rolling forecasts, which update monthly or quarterly, and through variance analyses that compare actual cash flows against projections.

Scenario Planning helps leadership anticipate surprises. By modeling best, worst, and most-likely cases, a city can identify appropriate liquidity buffers—often aiming for at least one or two months’ worth of expenses. That cushion provides breathing room if revenues slow or emergency spending arises. In particularly uncertain times, it’s often wise to lean toward conservative revenue estimates to avoid budget shortfalls.

Immersive Example

Refining Your Revenue Forecast

While scenario planning addresses the ‘what ifs,’ the process of gathering the ‘what is’ also matters. Look at historical data—typically 3–5 years or longer—to spot patterns in taxes, fees, and other receipts, factoring in local business conditions and economic indicators. This trend analysis helps clarify where revenues might head in shifting markets.

Equally important is differentiating one-time windfalls (e.g., legal settlements, asset sales, or unpredictable grants) from stable, recurring revenue streams like property tax or routine fee income. Use one-time funds prudently for capital projects or debt reduction rather than ongoing expenses; overreliance on these temporary inflows can lead to structural imbalances if they dry up.

Investment Management

Because public funds are typically governed by strict rules, investment strategies should prioritize capital preservation. Common instruments include U.S. Treasuries, highly-rated municipal or corporate bonds, and money market funds that meet regulatory guidelines. Matching the maturity of these investments to known obligations helps avoid locking up funds when they’re needed for daily operations.

Regular monitoring of credit quality and maintaining a diversified portfolio (within the allowable policy limits) is crucial. Even in a low-yield environment, preserving principal and maintaining liquidity often outweigh the potential gains from riskier investments.

Pro Tip: Keep a cushion above your minimum daily cash needs so that unexpected emergencies or shortfalls don’t require hasty, and potentially costly, asset liquidations.

Banking Relationships

Well-structured banking accounts and services enhance both transparency and security. For instance, separating operating, payroll, and capital accounts makes reconciling and tracking various funds clearer. Centralizing major disbursements also helps identify anomalies more quickly.

Fraud prevention is equally vital. Technologies like positive pay, ACH debit blockers, and multi-factor authentication can thwart unauthorized transactions. Additionally, regular reviews of staff permissions and user roles help minimize internal control risks.

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Building Out the Fundamentals

While daily cash management might seem purely tactical—just making sure checks clear—these activities form the foundation of broader municipal financial health. Here are some ways to deepen and formalize your approach:

Beware of Overconfidence

Historical data is helpful, but never assume past trends will continue uninterrupted.
One-time events—ranging from natural disasters to sudden economic shifts—can upend the usual inflow/outflow patterns.

Daily, Weekly, and Monthly Coordination

Many finance teams coordinate cash and liquidity checks in stages:

1. Daily Reconciliations
   Compare bank balances and transactions against internal records. Address mismatches immediately to spot potential fraud or processing errors.

2. Weekly Liquidity Checks
   Review your short-term obligations—payroll, vendor payments, debt service—against actual and projected available cash. If shortfalls are anticipated, consider whether short-term borrowing or liquidation of near-cash investments is warranted.

3. Monthly Forecast Updates
   Combine real-time data on revenues, grants, and any unusual spending items into updated forecasts. Tracking variance from previous estimates refines your models over time.

4. Quarterly Scenario Reviews
   Present best- and worst-case scenarios to senior leadership, highlighting potential corrective measures if conditions deteriorate. Adjust investment strategies or reallocate internal funds if necessary.

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Tactical Tools & Key Metrics

A range of metrics and tools can reveal how well a municipality is managing its cash. These focus on operational efficiency, investment alignment, and banking security.

Cash Flow Metrics

• Days Cash on Hand: Indicates how many days the city can fund operations without fresh revenue.
  This is a straightforward measure of near-term resilience.

• Cash Conversion Cycle: Tracks the speed at which revenues (e.g., taxes, fees) convert to readily available funds.
  A shorter cycle typically means stronger liquidity positions.

• Variance Analysis: Periodically compare actual cash flows to forecasts.
  Identify and investigate significant deviations—this process refines future predictions and uncovers unexpected spending or revenue shortfalls.

Investment Metrics

• Weighted Average Maturity (WAM): Balancing near-term liquidity needs with the advantage of slightly longer maturities can yield incremental returns.
  Staying nimble is often prudent, but over-conservatism might leave potential returns on the table.

• Portfolio Yield vs. Benchmark: Regularly compare your returns against appropriate indices (e.g., short-term Treasury or money market benchmarks).
  Deviations can signal that adjustments are needed or that the policy constraints are overly restrictive.

• Concentration Limits: Diversifying across issuers, instruments, or maturities can reduce risk and improve overall stability.
  Many municipal guidelines cap exposure to any single security or issuer.

Banking & Fraud Metrics

• Transaction Error Rate: Tracks how often funds are misapplied, delayed, or otherwise mishandled by staff or banking services.

• Fraud Incidents & Near-Misses: Monitoring attempts and breaches helps measure vulnerability.
  A rising trend might necessitate stricter controls or additional cybersecurity measures.

• Downtime or Service Issues: If a bank’s systems go offline regularly, timely payments—and your reputation—can suffer.
  A reliable financial partner is critical for uninterrupted workflows.

Immersive Example

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Beyond the Day-to-Day

Solid daily cash and liquidity practices undergird many broader goals, from maintaining the city’s credit rating to sustaining reliable services for the public. While short-term thinking helps keep the lights on, forward-looking strategies ensure stability through changing economic conditions or one-off disruptions.

Creditworthiness & Trust

Credit rating agencies often look at a city’s daily liquidity metrics as evidence of disciplined fiscal management. Internally, employees and vendors gain confidence when payments arrive as promised, reinforcing trust and reliability at all levels.

Practical Next Steps

• Document Processes: Written, up-to-date procedures for approvals, reconciliations, and investments reduce confusion and provide continuity if staff members change roles.

• Invest in Tools: Specialized treasury management software can integrate forecasts, automate reconciliations, and track banking activity in real time.

• Train Staff: Cross-training teams can prevent single points of failure in roles like cash handling and forecasting. Consider periodic refreshers on fraud prevention and new system features.

Additional Considerations & Advanced Approaches

• Short-Term Borrowing and Credit Lines: Some municipalities maintain lines of credit or use Tax and Revenue Anticipation Notes (TRANs) to manage seasonal cash flow dips. When used wisely, these tools bridge gaps without overly compromising the balance sheet.
  Be mindful that such short-term borrowing should be repaid swiftly to avoid escalating interest costs or compounding liabilities.

• Policy Alignment: Ensuring your cash management policy aligns with broader goals, such as capital planning or long-term debt strategies, helps reinforce overall financial stability.
  For instance, avoid using dedicated capital funds for general expenses without a strong rationale and transparent approval process.

• Risk Monitoring: Stay informed about broader market trends, such as interest rate changes or regulatory shifts, that might affect investment yields or permissible instruments.

Keeping daily cash management practices both simple and resilient helps a city weather normal variations in revenue and spending, as well as navigate unanticipated challenges. Over the long run, a thoughtful, disciplined approach to liquidity is a cornerstone of fiscal health—both for routine operations and for the community’s continued growth.