Cash Management and sample ternd analysis

For any entity, cash management is very important. For a sovereign government it becomes further important as government is expected to honor its commitments without fail and incur several social and developmental expenses. Aim of public sector cash management is to forecast the availability of the total liquid cash resources at a point in time which is at the end of day, month, quarter, half year or year. To find out this simple figure a lot of data needs to be collected and then trend analysis needs to be done to find out reasonable requirement of funds. Any unusual or non-linear cash requirement, if estimated properly, will make the job of cash management simpler.

Since variable affecting cash flow are many and there are many factors influencing those variables, complex modern IT systems are available to produce cash flow projections and plans. However, before venturing into complex systems, developing countries must first use and let a system of collecting relevant data for cash management settle down and project cash requirements even without the use of complex software. It is possible to reasonably do the cash flow analysis and planning without an off-the-shelf IFMIS and debt management system with a cash management module.

Prudent cash management depends on sound revenue forecasting and tight project expenditure monitoring. An active analysis of historical data of expenditure alongwith assessment of requirements of future spikes and then a trend analysis of the same to cull out data in a scientific manner shall be good enough to get the projections within the acceptable limits. Since quality and reliability of data, in many developing countries may be an issue, hence, trend analysis may throw some data which will be off the mark. But following the model consistently and using corrections in the output, trends may be predicted to near perfection. Detailed analysis of the actual expenditures and its timing and revenues generated against their respective projections is a must. There are several components of expenditure, which are predictable in routine e.g. salary expenses, pension payments. In many countries, for such expenditures, it can be quite sufficient to develop a model for annual expenditure on the basis of monthly expenditure. Variations across and within months would not be significant in normal course. Any abnormal or having bearing on cash flow must necessarily be monitored and factored in while projecting cash flow.

There are several expenses incurred by government which are very volatile. It covers procurement and delivery of wide range of goods and services. In such cases, analysis need to done after obtaining finer details of expenses, may be even going to sub-chapter or line item level. This will eventually provide data to see where forecast errors have occurred and then corrective measures may be taken to avoid them in the future. Good source of data for elementary seasonal trend analysis is the historical expenditure database and annual budget line item appropriation. This may give an insight on efforts made by the line ministry in making an effort to produce accurate forecasts. For much of the analysis, the input data for the forecast will need to be fine. The annual budget by chapter and sub-chapter of the economic classification should provide ample data to project and figure out errors in projections. This data includes annual budget appropriations, revenue estimates, and debt servicing figures. This data may be taken in spreadsheet form and the historical database can be used to produce seasonal trend profiles for each sub-chapter (or item) which is then overlaid on the annual budget appropriation to produce an initial estimate of the expenditure or revenue for the desired timeframe. As the year progresses, there shall be a mechanism to collect further information and cash plans from the agencies and the budget department.

In an excel spreadsheet, data captured may be projected using different trend analysis techniques, depending upon the nature of data and variations therein. Data of revenue and non-tax revenue as well as expenditure of last five years have been tabulated and trend analysis used to project budget estimates of next two years for Government of India.

Table-1
	amount in million INR
	as per actual data
	Budget			Actuals@
	Estimates			for
	2013-14*			April 2013
Revenue Receipts	10563310			78980
Tax Revenue (Net)	8840780			31930
Non-Tax Revenue	1722520			47050
Total Expenditure	16652970			1016640

Table-1 contains data of budget of 2013-14 and actual of Govt. of India in the month of April,2013. Table-2 contains budget data of 4 years prior to 2013-14.

		Table-2 amount in million INR
	Budget estimates (BE) as per actual data
	Budget Estimates
	2009-10*	2010-11*	2011-12*	2012-13*
Revenue Receipts	6095510	6822120	7898920	9356850
Tax Revenue (Net)	4975960	5340940	6644570	7710710
Non-Tax Revenue	1119550	1481180	1254350	1646140
Total Expenditure	9532310	11087490	12577290	14909250

Table-3 has this data and data of two future years derived through trend analysis. Chart-1 and Chart-2 has been prepared from these two tables. Linear trend is having very good level of reliability as value of R-squared is very close to 1.

						Table-3 amount in million INR
	Budget estimates(BE) as per actual data						BE as per trend
	Budget						Budget
	Estimates						Estimates
	2009-10*	2010-11*		2011-12*		2012-13*	2013-14	2014-15
Revenue Receipts	6095510	6822120		7898920		9356850	10258555	11344637
Tax Revenue (Net)	4975960	5340940		6644570		7710710	8545015	9495803
Non-Tax Revenue	1119550	1481180		1254350		1646140	1713540	1848834
Total Expenditure	9532310	11087490		12577290		14909250	16431740	18193802

					Chart-1
Chart of Linear trend of Budget Estimates: Linear projection                                                                                                  (amount in million INR)

 

					Chart-2
Chart of Budget estimates of linear projected values                                                                                                                      (amount in million INR)

 Table-4 and Table-5 has similar data for actual revenue and expenditure of the month of April during last 4 years.

				Table-4
				amount in Million INR
				as per actual data
		Actuals@		Actuals@		Actuals@		Actuals@
		Apr-09		Apr-10		Apr-11		Apr-12
Revenue Receipts		118460		129790		68800		191190
Tax Revenue (Net)		74620		100620		37740		152100
Non-Tax Revenue		43840		29170		31060		39090
Total Expenditure		662170		672260		871300		877090
			Table-5
			amount in Million INR
			as per actual data
	Actuals@		Actuals@		Actuals@		Actuals@		Actuals@		Actuals@
	Apr-09		Apr-10		Apr-11		Apr-12		Apr-13		Apr-14
Revenue Receipts	118460		129790		68800		191190		166360		182080
Tax Revenue (Net)	74620		100620		37740		152100		133660		150616
Non-Tax Revenue	43840		29170		31060		39090		32700		31464
Total Expenditure	662170		672260		871300		877090		981655		1066035

Chart-3

 Chart of Actual data with Polynomial trend analysis and projected values

(amount in million INR)

However, in the case of actual figures of April, variations are too significant; hence polynomial trend analysis has been used (Chart-3). It has given reasonably reliable projections with acceptable value of R-sqaured.

Chart-4

Chart of linear projected values of actuals

                                                                                                                       (amount in million INR)