How Cash Flow Forecasting Helps with Investing

Investment Objectives

• Ensure liquidity for disbursements
  • Invest in the Convenience Fund for full liquidity
    
    • Access your funds in the Convenience Fund with same-day availability
  • Schedule investment maturities to avoid negative balances
    
    • Select securities that mature on or before a disbursement is to occur in accordance with projected revenues and expenditures and organization policies.
  • Borrow
    • If you determine staying fully invested is beneficial to your situation, you can consider short-term borrowing with your bank, or issue tax or revenue anticipation securities.
• Manage investment risks
  • Market risk is the risk of loss due to factors affecting the overall market. In fixed income investing, market risk is often synonymous with interest rate risk, or the risk that the value of a security falls as interest rates increase.
    • This risk can be managed by investing in a diversified maturity spectrum where funds will mature systematically. So, the funds that mature can be reinvested at higher returns as interest rates rise.
  • Liquidity risk – is the risk that there will not be adequate liquidity for disbursements or other obligations when these are required.
    • Invest in the Convenience Fund for full liquidity
      • Access your funds in the Convenience Fund with same-day availability
      • The Convenience Fund accepts direct deposit of State and Local tax distributions. Direct Deposit provides for the safe and immediate investment of government funds.
    • Schedule investment maturities to avoid negative balances.
      
      • Simply select securities that mature on or before disbursements are to occur or before negative or trigger levels are reached.
      • Have investments mature in steps or in a laddered basis so funds will always be available to meet obligations.
• Enhance investment returns
  • Over time and, in general, longer term maturities tend to generate higher returns. With the help of a detailed financial planning and analysis model you may extend maturities or stay invested until you have disbursements or required outflows to meet
    • Avoid “opportunity cost” of staying overly liquid or not being fully invested.
    • Investors with longer time horizons and arrangements for immediate liquidity needs may consider investments with longer maturities such as the 1- 3 Year Fund. Over time, all else being equal, the higher yield to maturity of the longer term funds compared to that of shorter maturity funds, can be expected to provide meaningful outperformance – a direct benefit of compound growth.
      • However, investors who chose this option should be prepared for higher volatility in the interim.
    • As well, investors with longer time horizons and arrangements for immediate liquidity needs may consider investments with longer maturities such as certificates of deposit (CDs), individual securities or other bond funds that meet their own requirements.
• Financial Planning and Analysis Tools
  • Better financial planning and analysis can help support the investment objectives listed above. Budgetary, multi-year forecasting and detailed cash flow modeling are essential analytical tools that can support optimal investing.
  • The MuniCast Simplified Cash Flow Demonstration Model provides one simple example of how a spreadsheet can be used for better visualization of monthly revenues, expenditures and corresponding monthly balances. Additional and more complex financial modeling and analysis should also be used to generate a comprehensive analysis of your organization’s financial constraints and opportunities.