Good Practices in Cash Management for Developing Country Governments

Doug Hadden, VP Products

We’re seeing increased interest in cash management among developing country governments. There are very few Public Financial Management (PFM) ‘best practices’ yet many good practices that are better depending on the country context.

 

Why is cash management important?

 

Effective cash management is enabled through effective budget formulation

What is cash management?

What are the differences between managing “cash” and “liquidity”

More developed countries make the distinction between cash management as a long-term planning and analysis function and liquidity management to ensure adequate cash is on hand. Short-term investments to ensure that there is effective use of the cash on hand are considered a treasury functionrather than a cash management function exercised through spending ministries.

How are GRP systems used to improve cash management?

 

What is the Treasury Single Account (TSA)?

A TSA can be defined as a unified structure of government bank accounts enabling consolidation and optimum utilization of government cash resources. It separates transaction- level control from overall cash management. In other words, a TSA is a bank account or a set of linked bank accounts through which the government transacts all its receipts and payments and gets a consolidated view of its cash position at the end of each day.

Why is the TSA critical to effectivecash management?

What problems do developing country governments face when implementing cash management?

What is the linkage between cash management and budget execution?

What are the characteristics of a good cash management system?

What are the stages to develop an effective cash management system in developing countries?

The sequencing of cash management functionality in developing country governments differs by context. Sequencing generally follows a pattern similar to this:

Stage 1: Addressing Fundamentals

Step 2: Forecasting capability

Step 3: Beyond prerequisites and basic cash planning

Step 4: Rough tuning  and fine tuning

How is cash forecasting accomplished?

 

How can GRP systems improve cash management?

  • GRP systems enable progressive activation enabling governments to sequence cash management functionality
  • Support for electronic funds transfer and integration among ministries provides up-to-date liquidity information
  • GRP systems support the migration to the TSA and numerous TSA methods
  • Comprehensive transactional information enables the development of cash requirements, cash flow and aging reports
  • Historical informationin GRP systems enable creating credible budgets using spending trend analysis
  • Through the use of commitment accounting, GRP systems track the entire procurement cycle from requisitions enabling improved prediction of cash requirements
  • Budget and commitmentcontrols can include warrants, or authorization to spend, over short periods of time based on cash forecasts
  • Cash controlscan set thresholds to limit spending should there be reduced liquidity
  • Workflowprocesses in GRP systems enable governments to adjust for temporary cash problems and alerts decision-makers on potential liquidity problems

What is a good practice approach to using GRP for good cash management?

  1. GRP software supports the use of the Treasury Single Account.
  2. GRP software provides the historical information necessary to make effective cash forecasting.
  3. GRP software provides budget planning and budget execution functionality to ensure creating credible budgets, managing against the budget and adjusting for cash availability.
  4. GRP software provides integration among revenue and expenditure systems including payment systems.
  5. GRP software can eliminate the poor practice of cash box budgeting.

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