Foreword

Chief executives are responsible for promoting the efficient, effective and ethical
use of Commonwealth resources as part of their responsibilities under the
Financial Management and Accountability Act 1997. Good cash management in
agencies is an important component of this, and is established business practice
in successful, high performance organisations.

Importantly, improved cash management by agencies is integral to more efficient

management of resources under an accrual accounting and budgeting
framework and devolved banking arrangements. It can improve agency business
operations and also assist the Treasury in managing the Commonwealth’s
overall day-to-day cash requirements.

Good cash management practice typically involves collecting and banking

revenue promptly and making payments no earlier than necessary, having regard
to program and service delivery objectives. That is, cash management
should serve both the program objectives and the wider budgetary objectives
of government.

Recent Australian National Audit Office (ANAO) audit reports have drawn
attention to opportunities to improve the management of cash by agencies. Over
the same period, the Department of Finance and Administration (DOFA) has
issued guidance on good cash management. Proposed changes to agency
banking arrangements will include incentives for agencies to improve cash
management in the Commonwealth.

This guide, which draws on ANAO, DOFA and agency experience, is designed to
provide practical assistance to agencies to improve their cash management, and
hence the performance of their programs, in the accrual - based financial
accountability framework.

I commend this guide to you and encourage its wide use.

P.J. Barrett
Auditor-General
March 1999

i
ii
 How to
make the most out of this guide

This guide is intended to help managers handle practical problems

involving cash management issues. It also provides background material
on recent technological developments and places specific financial
decisions in the wider context of the agency and the Commonwealth. The
synopsis below outlines key messages appearing in each chapter.

Chapter 1 Cash management at Commonwealth and Agency levels

• cash management in the context of program objectives, the
Commonwealth’s overall spending to achieve outcomes, accrual
budgeting and agency culture;
• the legal obligations of chief executive officers;
• cash management policies and practices that should be documented; and
• staff awareness and training in relation to resource management.

Chapter 2 Payments
• when the 30-day rule for payments applies;
• finding better ways of timing and structuring payments;
• mechanisms that promote savings;
• making the most of cheques, electronic payments and credit cards; and
• applying just-in-time principles to administered payments and grants.

Chapter 3 Revenue collection

• the Commonwealth’s legal requirements for revenue collection;
• good practice in handling large revenue inflows;
• questions for agencies in planning their revenue collection arrangements;
and
• obligations in managing debt and elements of a successful systematic
approach.

Chapter 4 Forecasting and managing cash flows

• effective planning for cash helps agencies face changing circumstances
more confidently;
• the responsibility of agencies to contribute to lower public debt interest
by helping the Treasury manage the Commonwealth’s cash requirements;
and
• steps agencies can take to improve cash flow forecasting.

Appendix A Cash management techniques

• checklists of key issues and questions when agencies develop cash flow
statements and cash management plans.

Appendix B Options for revenue collection mechanisms

• how various revenue collection mechanisms operate and their relative
attractions; and
• important issues when agencies enter into arrangements with third
parties.

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 © Commonwealth of Australia 1999
ISBN 0 044 38818 8

iv
 Contents Page
C o n t e n t s

Foreword i

1. Cash management at
Commonwealth and Agency levels 1
What cash management involves and why it is important 1
Cash management in the Commonwealth public sector 2
The need to develop better practices 2
The impact of accrual accounting on cash management 2
Agency banking and cash management 3
Agency culture and operating environment 3
The role of chief executive officers 3
Operating policies and practices in agencies 4
Performance reporting and monitoring 4
Training and awareness 4

2. Payments 5
Payment on the due date 5
Mechanisms to promote savings 6
Know your cash payment cycle 6
Look for efficiency in payment processing 6
Using cheque or electronic transfer 6
Credit cards 7
Obtaining discounts large enough to justify making a prepayment 8
Just-in-time cash also necessary for administered payments 8
Negotiating with statutory authorities and the States 8
Administration of grants 10

3. Revenue collection 11
The Commonwealth’s requirements 11
Better practice in revenue collection 12
Should intermediaries be required to remit revenue earlier? 12
Assessing methods of collecting revenue 13
Managing debtors 13
Outstanding debt is costly to the Commonwealth 14
Early action to recover debt is vital 14

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 Contents Page
C o n t e n t s

4. Forecasting and managing cash flows 15

Forecasting cash flows 15
Treasury management of the Commonwealth’s overall cash needs 16
Accurate agency forecasts contribute to better Commonwealth cash management 16
Where agencies can improve forecasting performance 17

Appendix A. Cash management techniques 18

A. Ask yourself some key questions 18
B. Forecasting cash flows 18
C. A basic check-list 18

Appendix B. Options for revenue

collection mechanisms 19
Cheques and over-the-counter receipts 19
Electronic funds transfer 19
Direct credit and debit 20
Entering into agency arrangements with other organisations 20
Telephone banking 21
Electronic kiosks 21
Credit card merchant facility 21

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C h a p t e r 1
Cash management
at Commonwealth
and Agency levels

The principles of good cash

management are relevant to all
organisations. This guide is intended
to highlight better practice cash
management policies and procedures
for chief executives and other senior
executives, and to provide more
detailed guidance for financial
administrators.

This guide is particularly applicable to agencies that currently

operate on the Official Public Account of the Commonwealth
of Australia and do not have a separate legal existence from
the Commonwealth. In short, it is relevant to all agencies
covered by the Financial Management and Accountability Act
1997 (the FMA Act) and its supporting regulations and orders.

What cash management involves and why it is important

Efficient cash management is the series of processes used by an organisation to obtain

the maximum benefit from its flow of cash funds. The underlying objective of cash
management is having enough cash available as and when it is needed.

Sound cash management involves better timing of expenditure decisions, earlier

collection and banking of revenue, and more accurate forecasts of cash flows.
This helps minimise the cost of any borrowing that is necessary and facilitates investing
surplus funds to achieve the best return overall.

The Commonwealth’s primary objective continues to be efficient program delivery

contributing to the advancement of desired outcomes. Good cash management
is important to better program delivery but should not be seen as an end in
itself. Decision-makers should aim to balance the needs of efficient program delivery
with effectively managing the Commonwealth’s cash flows.

1
 Cash management at Commonwealth and Agency levels

Cash management in the The need to develop better practices

Commonwealth public sector
Recent evaluations and audits1 have
Since 1996-97 the Commonwealth identified a lack of awareness of the time
Government has raised and spent more than value of money or of good cash
$130 billion annually. In 1998-99, on a cash management practice in Commonwealth
accounting basis, the Treasury forecasts total agencies. These evaluations and audits
revenue of $146.2 billion and total have drawn attention to the following
underlying outlays $142.9 billion. Obviously key principles of cash management:
the costs of less than optimal cash
management in agencies can be quite • ensure that receipts are collected by due
significant. dates and banked promptly;
• ensure that payments are made only when
When any agency spends, the funding they are due except where doing
alternatives are for the Commonwealth to: otherwise creates a net advantage to the
Commonwealth;
• draw on revenue raised previously; or • forecast cash expenditures and payments
• borrow funds through the Treasury. accurately;
• have cash available just in time to advance
The Treasury manages the Commonwealth’s program goals; and
debt, which approached $100 billion in • rationalise the numbers of bank accounts
1995-96, but has fallen each year since. In held by agencies.
1998-99, public debt interest (PDI)
expenditure is estimated to be $7.4 billion.
This is offset by interest revenue, primarily The impact of accrual accounting on
on balances at the Reserve Bank of cash management
Australia (RBA).
All Commonwealth agencies have been
The Commonwealth’s net daily position is required to report on an accrual accounting
derived from the balances of all accounts basis since 1994-95. Adoption of a full
held in what is called the ‘overdraft group’ at accrual-based financial framework is
the RBA. The Commonwealth either: planned for 1999-2000.

• earns interest on positive aggregate Under the accrual accounting approach,

balances (at about the target overnight monitoring cash flow remains critical. Cash
cash rate); or flows from revenue and expenditure will
• pays interest on overdrawn amounts continue to influence markedly the
(at an interest rate referenced to the prime Commonwealth’s activity in the capital
lending rate of the major banks). market in the year ahead, highlighting the
need for sound cash management practices.

1 For example, Department of Finance, Revenue Collection Evaluation - Report of an Inter-agency Study, 1994; Auditor-General Report No 22 1993-

94, Cash Management in Commonwealth Government Departments; Auditor-General Report No 10 1994-95, Cash Management in Commonwealth

Government Departments; Report of the Joint Committee of Public Accounts, Cash Matters: Cash Management in the Commonwealth, October 1995;

Department of Finance, Report on Cash Management Issues concerning Commonwealth Payments to Statutory Authorities and Specific Purpose

Payments to the States, January 1996; Auditor-General Report No 36 1996-97, Commonwealth Natural Resource Management and Environment

Programs; Administration of Grants Better Practice Guide, Australian Government Publishing Service, May 1997

2
 Agency banking and cash
management
From 1 July 1999, agencies will be required
to open and manage their own bank
accounts. This will include choosing their
transactional banker and meeting the cost of
all fees and charges associated with the
operation of their accounts. Agencies will be
responsible for managing the funds they
receive from the Budget, including ensuring
the adequacy of working capital and
provision for replacement of assets over
time. As agencies will receive and pay
interest on departmental cash balances to
reflect the cost of cash in relation to their
administration, the management of cash
and banking will be a key responsibility at
the Agency level.2
Agency culture and operating
environment
Public sector reforms have created an
increased emphasis on agency self-reliance
in managing for results. By introducing the
most effective methods of managing cash,
agencies achieve benefits for both their own
programs and for the Commonwealth as a
whole.
An agency’s operating environment directly
affects its approach to cash management.
Addressing the following questions can help
determine key elements in the agency’s
approach:
• Does the agency regularly receive or pay a
large number of small amounts?
• Are payments relatively large and less
frequent?
• Does the agency experience large peaks in
its receipts or payments?
2 For details of the proposed new agency banking arrangements see Agency banking Framework - Guidance Manual, Department of Finance and
Administration, 1999
3 Guidelines for Managing Risk in the Australian Public Service, MAB/MIAC Report No. 22, October 1996 outlines comprehensively how to identify,
analyse, prioritise, manage and treat risks.
3
• Does it have large individual one-off
receipts or payments?
• Is it able to negotiate the timing of some
of its receipts and payments, or influence
them through interest or other incentives?
High level strategies should be developed for
risks3 associated with cash management
and, at the operational level, detailed
analysis of individual receipting or payment
processes might lead to efficiencies.
Cash management in all agencies is affected
by rapid technological change. Electronic
transactions have changed the face of
banking activity and permitted greater
integration of financial services. There will
be even greater changes as electronic
commerce becomes more widely
implemented in both the public and
private sectors.
It is important for agencies wishing to be
successful to show a readiness to change,
including the ability to examine critically their
current operations as part of continuous
improvement to achieve high performance
outcomes.
The role of chief executive officers
Developments in public sector management
in recent years have provided a more direct
role for chief executive officers in the use of
Commonwealth resources. For example, the
FMA Act requires chief executive officers
specifically to promote the efficient, effective
and ethical use of Commonwealth
resources. Similarly, the FMA Regulations
authorise all chief executive officers to
tailor, according to the needs of their
own agencies, individual Chief Executive’s
Instructions concerning, among other
things:
 Cash management at Commonwealth and Agency levels
• handling, spending and accounting for
public money;
• making commitments to spend public
money; and
• recovering amounts owing to the
Commonwealth.
Both the Act and Regulations permit powers
or functions conferred on chief executive
officers, or delegated to them, to be
delegated in writing to other officials.
Operating policies and practices in
agencies
Chief executive officers have special
responsibilities for the care and custody and
payment of public money, including the
development and documentation of agency
policy and practices. These responsibilities
are set out in detail in the FMA Orders.
Briefly, the documentation of agency policies
and practices concerning cash should cover
at least:
• responsibilities for cash management,
including operational aspects,
management reporting and executive
supervision;
• establishment and operation of bank
accounts;
• procedures for payments and accounts
payable, mail opening, banking, revenue
and accounts receivable, and debt and
credit management;
• the business implications and use of
electronic commerce;
• the preparation and ongoing review of the
agency’s cash budget for effective
operation; and
• reporting against indicators that measure
performance in terms of economy,
efficiency and effectiveness.
Performance reporting and
monitoring
Performance reporting has a major role to
play in evaluating the efficiency and
effectiveness of cash managment policies
and practices. Effective performance
reporting can draw on the information
obtained from standard financial reports
developed from computer databases.
Information from these sources should:
• enable agencies to develop performance
indicators on specific cash management
matters, prompting follow-up of material
variations from predetermined standards
and targets; and
• facilitate benchmarking against
organisations with comparable functions.
Training and awareness
Improved cash management in agencies
relies heavily on staff training that clearly
conveys the importance of the concept, not
just for efficiency reasons but also because
of its impact on agency’s outputs and
outcomes. Any training program should
encourage staff suggestions for doing things
better.
Training topics that can help develop staff
attitudes receptive to efforts to improve cash
management include:
• an appreciation of the time value of
money and cost of finance;
• better timing of cash receipts and
disbursements practices;
• enhanced cash flow forecasting and
monitoring; and
• development of appropriate higher level
performance indicators and reporting
mechanisms.
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C h a p t e r 2
Payments

The challenge for agencies

in making payments is to
find better ways of timing
and structuring purchase
agreements to achieve
objectives within their
available resources.

Savings to agencies and the Commonwealth can be achieved as a

result of better expenditure decisions or contract negotiations
involving the timing of payments, not by conduct contrary to the
Commonwealth’s policy of payment on the due date.

Payment on the due date

It is Commonwealth policy to pay accounts on the date specified in the agreement for
payment with the supplier. This is normally thirty days from the date of acceptance of
goods or services and the receipt of a correctly rendered invoice.4

In general, when there is scope to negotiate contractual payment terms, the later the
agreed payment dates, the better is the overall outcome for agencies and the
Commonwealth. As outlined in the FMA Regulations people responsible for procuring
property or services should:

• have regard to the Commonwealth Procurement Guidelines; and

• make a written record of reasons for any action that is not consistent with them.

4 Commonwealth Procurement Guidelines: Core Policies and Principles, March 1998, Section 3

5
 Payments

Mechanisms to promote savings Look for efficiency in payment

processing
Agencies may generate savings for
themselves and the Commonwealth by: Apart from opportunities to improve cash
management by timing discretionary
• re-engineering financial and purchasing expenditure decisions better, savings may
operations to achieve outcomes more be achieved by:
efficiently;
• streamlining processing associated with • streamlining processing5 to eliminate
making payments; activities that do not add value;
• consolidating payment cycles instead of • consolidating processing or grouping
making daily payments automatically; payments to the same payee; or
• minimising inventory levels through • making payments more cheaply
awareness of ‘just-in-time’ delivery by alternative mechanisms.
options;
• conducting whole-of-life assessments
when purchasing items for which there Using cheque or electronic transfer
are significant ongoing maintenance and
other running costs; Payments of entitlements in cash is a poor
• timing purchases to obtain better value; practice because funds drawn in advance of
• negotiating better terms in contracts for need remain idle until disbursed, and this
large capital items, or improving presents security and control risks. Several
structuring of progress payments for encashment options6 allow agencies to draw
work in progress; and cash as late as possible where this is still
• making prepayments in cases where the essential.
resulting discounts represent a net saving
to the Commonwealth. Electronic transactions are much more
economical to process than those using
paper. It is a government intention that
Know your cash payment cycle electronic payments to suppliers be a
normal means for Commonwealth payments
Existing ordering patterns may permit by 20007.
economies of scale through larger orders of
some items, or the overall costs of holding Reflecting differences in costs of the two
inventory may be reduced through more payment mediums, since July 1995 most
timely ordering arrangements. A thorough agencies have been charged by the
review of present practices, including Department of Finance and Administration
benchmarking of unit costs and other service for the production of cheques, but have
characteristics against those of comparable been able to have their electronic payments
organisations, may produce useful ideas processed through FIRM8 without cost.
about how program objectives could be met Nonetheless, more than two million such
better by other means. cheques have been issued in recent years.
Several factors have contributed to this
situation, such as the limited field lengths in

5 Paying Accounts, Australian National Audit Office Better Practice Guide, November 1996 outlines better practice in the payment of accounts.

6 These are set out in Finance Circular 1997/11, Access to Cash by Commonwealth Agencies, and the circular, Reserve Bank Agency Arrangements
with the Commonwealth Bank and with Australia Post, issued by the Department of Finance and Administration in October 1997. The latter
containing commercial-in-confidence information, is available to agencies from the Financial Framework Branch.
7 Investing for Growth: the Howard Government’s Plan for Australian Industry, Department of Industry, Science and Tourism 1997

8 This centralised payments processing and accounting facility was outsourced in January 1999, and will not be required by the Commonwealth for
such activity after 30 June 1999.

6
 standard computer file formats to record • considerable transaction savings occur
details about individual payments and the because the card supplier does the
reluctance of some suppliers to provide processing, and an audit trail is inherent
details of their bank accounts. in each monthly statement;
• suppliers receive their payment almost
For the Commonwealth, cheques may have immediately from the credit card supplier;
a cash management advantage over and
electronic transfers unless agencies take • the Commonwealth gets an interest-free
conscious action to make the latter as late as period of between 15 to 45 days before
possible consistent with the due date policy. agencies make monthly payments.
For example, until cheques are presented,
the Commonwealth continues to earn Since July 1995, ANZ Visa and American
interest on their value whereas the value Express have been the Australian
associated with electronic payments is Government Credit Card (AGCC)
settled between banks on the day they 9
contractors . Suppliers are paid for their
are made. goods or services on the day they process
credit card transactions through an
When electronic payments are extended as electronic terminal or, with some exceptions,
part of electronic commerce or other on the day they present paper vouchers to a
initiatives, it is important to consider nominated bank. They pay a proportion of
appropriate due date arrangements. the gross value of transactions (the merchant
Sometimes cheques have consistently been fee) to the card supplier monthly.
presented several days after receipt. Rather
than forgo the past advantages Guidelines and systems are required to
automatically in the transition to direct govern the use of the cards and to guard
credit, it might be possible to negotiate the against their unnecessary proliferation or
electronic replication of existing presentation inappropriate use in agencies. A Guide on
patterns. Best Practice10 highlights the need for:

Although the trend is towards increased use • effective training of all card-holders
of electronic transfers, the key to effective before they are issued with an AGCC
cash management is for agencies to take the card;
costs and benefits of cheques or electronic • a limit to the total credit available to each
transfer into account explicitly in deciding cardholder in each billing period;
upon the most appropriate arrangements. • an agency limit on the value of individual
transactions; and
• systems for checking against travel
Credit cards allowances and the reimbursement of
private expenditure when the card is used
Processing small payments is expensive for in relation to travel, hospitality or
the Commonwealth. The main advantages, entertainment11.
for example, of using credit cards for small
transactions are that: There are two particular reasons why care
should be exercised in the use of credit cards
to make larger payments:

9 This contract will expire on 30 September 1999, and thereafter individual agencies will be responsible for negotiating their own arrangements.

10 Department of Finance, The Australian Government Credit Card (AGCC) - A Guide on Best Practice, revised and reissued November 1995

11 The Financial Management and Accountability Orders specify that coincidental private expenditure must be repaid to the Commonwealth.

7
 Payments

• for items not available off the shelf, the Just-in-time cash also necessary for
supplier might decide to incorporate the administered payments
merchant fee in the price to the
Commonwealth; and Because there are carry-over provisions for
• in cases where the merchant fee is not running costs (representing about 10 per
anticipated in the pricing structure but a cent of total Commonwealth outlays) at the
supplier is reluctant to refuse credit card end of each financial year, agencies already
payment for fear of losing the sale and benefit directly from better cash
possible future ones, over time the management of discretionary elements in
relationship with the Commonwealth their own running cost expenditure13.
might come under pressure.
Having enough cash available just in time is
also a key principle for administered
Obtaining discounts large enough to payments. Accounts are paid and cash
justify making a prepayment obtained no earlier or later than necessary.

Suppliers will sometimes offer a discount for Entitlements to pensions or other social
an early payment after invoicing or for a security or welfare benefits paid under
prepayment. If such an offer is taken up, the standing appropriations constitute over 35
cost to the Commonwealth includes the per cent of annual Commonwealth
interest earnings forgone in the intervening outlays. These are currently paid
period. electronically through the RBA’s Government
Direct Entry System as an example of just-
People responsible for spending in-time arrangements at low processing cost.
Commonwealth funds are required, under
the FMA Regulations, to be satisfied that it
will be spent efficiently and effectively. In Negotiating with statutory
cases of prepayment or early payment, authorities and the States14
approval should only occur when the
discount is larger than the interest cost of Payments to statutory authorities or specific
early payment12. purpose payments (SPPs) to the States which
together represent more than 20 per cent of
In these cases where prepayment is the Commonwealth’s annual expenditure fall
considered, the risk of the supplier’s into the following categories, or
non-performance because of production, combinations of them:
stocking, delivery or financial difficulties
must also be assessed. The discount should • payments for recurrent, regular
be large enough to compensate for both expenditure;
those kinds of risks and the earlier call on the • payments for ‘lumpy’ expenditure such as
Commonwealth’s funds. capital grants;

12 Finance Circular 1995/03, Cash Management: Timing of Payments to Contractors and Traders, Lease versus Buy and Finance Circular 1995/03,
Cash Management: Timing of Payment, illustrate how to make the relevant calculations.

13 Under accrual budgeting, running costs will be replaced by resourcing based on the full price of outputs produced.

14 Estimates Memorandum 1997/47, Cash Management of Payments to Statutory Authorities and to the States via Specific Purpose Payments

8
 • reimbursement of expenditure by others
for services; and
• expenditure under a purchaser/provider
arrangement.
Current government reforms include a
significant move towards purchaser/provider
relationships with statutory authorities and
the States. Over time, the expansion of these
arrangements will lessen agencies’ need to
be directly concerned with service-providers’
cash management.
Under the just-in-time arrangements
endorsed by the Government in April 1997,
the primary concern remains the efficient
achievement of program goals. From the
Commonwealth’s perspective, prompt
reimbursement of expenditure already
undertaken is the preferred arrangement
when new SPPs are instituted or existing
arrangements are reviewed:
• payments before delivery must take
account of the risk of the provider’s sub
sequent inability to meet the terms of an
agreement; and
• in other circumstances, the guiding
principle should be that funds are as
required for the purpose for which
payments are being made, and in
accordance with legislation and/or
agreements, but not significantly in
advance of requirements.
Even when agencies do not have a clear
purchaser/provider relationship with defined
prices for outputs, they still have a
responsibility to help achieve desired
9
outcomes and outputs for the
Commonwealth as efficiently and effectively
as possible. Some good practices in cash
management include:
• carefully negotiating the most
appropriate times and intervals for
payments and ensuring that they occur
on the due date thereafter;
• monitoring recurrent payments to ensure
that changed circumstances do not result
in a build-up of cash;
• in the case of very large lumpy payments,
supplementing an agreed schedule of
payments with regular cash flow
statements and reviews of work in
progress;
• using milestones of progress against
targets as markers for determining future
flows of cash; and
• agreeing on a reasonable working level
for cash balances and identifying the
most appropriate carry-over
arrangements at the end of a financial
year if funds remain unspent.
 Payments

Administration of grants

In audits of grant administration the

ANAO has found15 that significant interest
savings could be achieved by altering some
grant payments from annually in advance to
quarterly in advance, and that further
savings were possible through linking
progressive payments directly to actual
performance. Other elements of better
practice in grant administration are set
out in the ANAO's Administration of Grants
Better Practice Guide16.

It will be necessary in some circumstances to

exercise judgement in the application of the
just-in-time principle to reflect the inability of
grant recipients to meet their obligations
without prompt funding of necessary capital
expenditure, or the administrative costs
associated with continual monitoring of
small expenditures. However, large amounts
should not be paid in advance because of
the risk of non-performance of obligations,
or non-compliance with the terms of a
grant17.

15 Auditor-General Report No 36 1996-97, Commonwealth Natural Resource Management and Environment Programs

16 Australian Government Publishing Service, May 1997

17 See, for example, Auditor-General Report No 24 1997-98, Matters Relevant to a Contract with South Pacific Cruise Lines Ltd

10
C h a p t e r 3
Revenue
collection

Just as good cash management

of payments is important
to program efficiency and
effectiveness, it is also vital for
the Commonwealth that all
revenue should be collected
and banked as efficiently as
possible.

This involves using all cost-effective means to ensure the maximum

amount possible is banked on the day of receipt18. When better
practice is not achieved, net public dept interest increases because
the total of Commonwealth cash balances held overnight at the
RBA is less than that required, and the Commonwealth incurs the
additional cost of borrowing to satisfy its cash requirements.

The Commonwealth’s requirements

Under current arrangements, an official who has custody or control of Received Money
in a bankable currency must bank it to the credit of an official receipts, imprest or
central account as appropriate, as soon as practicable after receipt, but in any case not
later than:

• the next banking day; or

• a banking day approved by the chief executive.19

Proposed changes to the FMA Act would allow departmental receipts to be paid into
agency departmental bank accounts (with the RBA transitional banking business or
with private sector financial institutions) and held there until spent. All administered
receipts would be held in agency administered receipts accounts swept daily to the
RBA. Such accounts may be established by agencies with the RBA transactional
banking business or with private sector banks.

18 Under current arrangements, deposits made to the Commonwealth Bank will be paid to the RBA on the same day if agencies observe the
procedures set out in the circular, Reserve Bank Agency Arrangements with the Commonwealth Bank and with Australia Post, issued by the Department
of Finance and Administration in October 1997, and available from the Financial Framework Branch.

19 Financial Management and Accountability Orders 1997, Suborder 3.1.1

11

As required by Section 81 of the
Constitution, all money raised or received by
the Commonwealth must be paid into the
Consolidated Revenue Fund (CRF). The mon-
eys of the CRF are a component of the
Official Public Account of the
Commonwealth of Australia held at the RBA
and may not be spent unless appropriated by
Parliament for specific purposes.
The FMA Act 1997 requires the prompt
banking of receipts in an official account.
The presence of as much as possible of the
Commonwealth's overnight balances in the
overdraft group at the RBA is critical for the
RBA's role in managing the liquidity of the
banking system and for the Commonwealth
to manage its "group" cash and debt. To
achieve this, the new banking arrangements
will include daily automatic sweeps of
remaining balances to an official account
maintained by the Commonwealth for this
purpose at the RBA.
Better practice in revenue collection
Examples of better practice include:
• issuing invoices, with the due date for
payment clearly specified as soon as
possible after receiving orders for, or
delivering services;
• offering revenue payers a convenient
range of cost-effective alternative ways to
make their payments;
• identifying and adequately preparing for
peak workloads and demands;
• agencies responsible for processing and
banking large one-off amounts ensuring
that they are fully conversant with
industry capabilities and charges before
entering into agreements, and seeking to
maximise the same-day value of receipts;
and
• introducing late payment penalties and
taking steps to pursue outstanding debts,
systematically and promptly.
Revenue collection
If it is not possible to process and reconcile
all cheque payments for banking on the day
they are received, operating procedures
should specify a threshold beyond which
individual payments will be given special
treatment to ensure that they at least are
banked:
• arrangements can usually be made with
the RBA or other financial institutions to
accept quite late payments; and
• an individual agency’s circumstances will
indicate appropriate thresholds for
expedited processing and banking.
Should intermediaries be required to
remit revenue earlier?
Modern software applications have
simplified many accounting processes,
reducing the complexity and unit cost of
entering transaction information. Various
desktop-banking packages have been
developed, enabling users to issue electronic
instructions that specific payments be made
and to monitor their bank accounts in
real time:
• intermediaries collecting taxes, levies
or other payments forwarded periodically
to the Commonwealth should find
the calculations and remittances
associated with this role increasingly
less burdensome;
• when reviewing current revenue collection
procedures, agencies should examine
whether expedited lodgement with the
Commonwealth of payments collected by
intermediaries is feasible; and
• following legislative changes, from July
1998 large payers of withholding taxes
have been obliged to make electronic
remittances earlier and more frequently,
increasing greatly the proportion of
money received on the new due dates and
smoothing out the Commonwealth’s
revenue peaks.
12
 Assessing methods of collecting Whatever range of revenue collection
revenue methods is adopted by an agency after
analysis, good practice suggests that:
Agencies can take advantage of the
continual advances in electronic-processing • performance be benchmarked regularly
technology for collecting and processing against other comparable operations or
revenue. There are two main areas for industry standards; and
agencies to consider in addressing methods • service level agreements for outsourced or
of collecting revenues: agency arrangements contain effective
mechanisms for dealing with consistent
• the efficiency of the methods of collecting failure to meet specified performance
and processing revenue and ensuring it is standards.
remitted quickly to the RBA or other
financial institutions; and A large number of different practical options
• having a wide enough range of choices exist today for revenue collection (for
for the convenience of those making example, locked boxes, electronic funds
payments. transfer and telephone banking). Appendix B
outlines a variety of collection options and
Agencies should consider: how best to use them.

• how effectively they can cope with peak

processing workloads; Managing debtors
• whether the expense of expedited
processing is justified by interest savings; A Chief Executive is required to seek recovery
and of each debt for which the Chief Executive is
• the extent to which their revenue- responsible unless:
collecting mechanisms ensure that
opportunities for delaying the • the debt has been written off as
transmission of payments are minimised. authorised by an Act; or
• the Chief Executive is satisfied that the
Because of technological advances, trends debt is not legally recoverable; or
have been towards agencies making • the Chief Executive considers that it is not
third-party arrangements for electronic economical to pursue recovery of
capture of payment data over a the debt.20
geographically wide network and
subsequent external processing of banking An agency operating at or near best practice
transactions - for example, the Australian in accounts receivable21 should be able to
Taxation Office’s (ATO) Billpay agreements maximise its early collection of revenue.
with Australia Post. Alternatively, rather than Nevertheless, late payments are inevitable,
invest heavily in specialised facilities that so a systematic approach to debt
would often have low throughput volumes, management is essential. Key considerations
agencies have increasingly outsourced such for agencies include:
processing to others capable of reaping scale
economies through a number of • the quality of the systems and staff
simultaneous service contracts. training for dealing with debtors;

20 Financial Management and Accountability Act 1997, Subsection 47(1)

21 Australian National Audit Office Better Practice Guide, Management of Accounts Receivable, December 1997 deals with these matters.

13

• the clarity of the procedures staff are
required to follow; and
• the extent of the resources applied in
pursuing debt.
Outstanding debt is costly to the
Commonwealth
Outstanding debtors impose additional costs
on the Commonwealth as the revenue still to
be collected either results in lower cash
balances overnight or, in aggregate, requires
more longer-term borrowing.
Action taken to minimise the incidence of
debts may include:
• offering a variety of cost-effective
convenient ways of paying;
• examining the potential of discounts for
prepayment in some circumstances;
• identifying specific sections of the past
debtor profile for improvement; and
• adopting a consistent approach to
imposing interest penalties for late
payment.
Early action to recover debt is vital
The longer debt is outstanding, the more
difficult it is to collect. It is, therefore,
important that accounts receivable staff be
trained to manage debtors confidently, while
remaining aware of legal obligations, such as
adherence to privacy principles. A good
approach would be to observe the following
aspects of the credit cycle22:
• early identification of overdue accounts or
other outstanding payments is crucial;
22 Finance Circular 1996/02, Management and Recovery of Outstanding Debts, provides a comprehensive guide to all aspects of debt management.
23 Waiver of recovery of debts due to the Commonwealth, Department of Finance and Administration pamphlet, November 1997, available from the
Financial Framework Branch.
24 Finance Circular 1997/07, Common Use Arrangement for Debt Recovery
Revenue collection
• an up-to-date debtors’ ledger helps staff
greatly in recovery action;
• contact with debtors should be within 14
days of the debt becoming overdue, by
phone or straightforward notice offering a
simple means of settling the debt;
• further notices, no more than 14 days
apart, should become progressively more
assertive in the absence of a suitable
response;
• staff must have not only clear guidelines
covering the circumstances in which
gradual repayment can be entertained,
but also the authority to negotiate within
those guidelines;
• staff must have clear guidelines about
referring debts to a debt collection
agency, or to the Australian Government
Solicitor for court action; and
• policies regarding writing off debt must be
set out clearly.
Debts to the Commonwealth must be
settled in full unless approval to waive
recovery of particular debts is given by:
• a Minister or delegate where there is a
specific waiver power in the relevant
legislation; or
• the Minister for Finance and
Administration where there is no specific
waiver power23.
The costs of collecting debts are met from
agency running costs because this
constitutes a normal part of their operations.
A Commonwealth panel of private collection
agents was appointed for three years from
March 199724 to undertake debt collection.
14
C h a p t e r 4
Forecasting
and managing cash flows

Improved cash flow fore-

casting gives agencies a
better understanding of
their financial environment,
leading to better financial
management and facilitat-
ing informed choices in
changing circumstances.

Forecasting cash flows

Effective planning for cash requirements is an essential element in improving an

agency’s financial efficiency. This entails:

• accurate and integrated budgets of operating activities and capital expenditures,

together with significant cash receipts and payments, on a periodic basis and
projected for 12 months;
• regular review and refinement over time, monitoring performance indicators of
timeliness, cost, quality and effectiveness to identify and seek explanations for
material variations from what was anticipated; and
• understanding patterns of cash movements to identify the fixed or variable and
seasonal or periodical components so that changing circumstances can be faced
with maximum flexibility.

As a first step towards establishing an effective cash management regime, agencies

could develop a model of known periodic cash obligations and one-off expenditures by
establishing the lead times required to process large administered payments to ensure
more accurate forecasts. Time series mapping might permit early detection of
underlying trends and revision of forecasts in cases where the level of receipts or
payments varies according to general economic conditions. Also relevant is the
experience of incentive regimes in New Zealand and New South Wales where agencies’
forecasts have proved quite accurate for the first three months and reasonably
accurate for the next three months.

15
 Forecasting and managing cash flows
Treasury management of the
Commonwealth’s overall cash needs
As the Commonwealth Treasury is
responsible for the borrowing activities of
the Commonwealth and for overall debt
management, it has primary responsibility
for ensuring that the government has
enough cash for its needs.
In carrying out its cash management
function, Treasury:
• forecasts daily Commonwealth revenues
and expenditures for up to a year to
estimate the Commonwealth’s expected
daily aggregate cash balance;
• identifies the weakest overnight
aggregate cash balance in the week or
weeks ahead as this is crucial to weekly
decisions about whether to undertake
short-term borrowings and, if so, how
much (in multiples of $100 million); and
• holds a public tender of Treasury Notes
when borrowing is deemed necessary.
Treasury Notes are issued with maturities of
five, thirteen and twenty-six weeks, after
account is taken of the forecast cash needs
at the time each borrowing is due to mature.
Given the volatility of revenue and
expenditure flows, changes in the timing of
revenue or expenditure can significantly alter
the Commonwealth’s optimal borrowing
decision.
As part of its overall Commonwealth debt
management responsibilities, the Treasury
also periodically issues and redeems series of
Treasury Bonds (the longest of which
currently has a maturity of around twelve
years) on which fixed interest is paid. The
timing of Treasury Bond issuance is guided
by overall debt management considerations
rather than being prompted by a likely major
short-term cash requirement.
25 Agencies may obtain further information from the Debt Management Branch of the Treasury.
Accurate agency forecasts
contribute to better Commonwealth
cash management
The Treasury relies heavily on information
from agencies to supplement the application
of historical patterns to annual Budget
estimates when forecasting expenditures
and revenues separately, for example:
• annual program estimates of outlays are
converted into draw-down patterns after
schedules are provided by individual
agencies, and because payment schedules
change over time, regular contact is
maintained with all major spending
agencies;
• daily revenue forecasts are extracted from
monthly tax, customs duty and excise
forecasts obtained after consultation with
the ATO and Australian Customs Service;
• specific agency information helps refine
forecasts of other revenues such as
dividends, interest payments and other
taxes, fees and fines; and
• detailed information on daily transactions
of $1 million or larger in programs helps
the Treasury track expenditures or
revenues and improve forecasts for the
rest of the year. (An agency contact for
each transaction of more than $10
million is requested as an additional
reconciliation mechanism and information
source if forecasts prove incorrect25).
Accurate agency forecasts contribute to
better Commonwealth cash management by
minimising the net cost of borrowing. If
actual cash balances exceed forecasts, the
Commonwealth incurs additional costs,
because interest on excessive borrowings will
usually exceed the interest earned on
positive cash balances at the RBA. Significant
deteriorations in the forecast daily cash
position can only be rectified by Treasury
Note tender, so the Commonwealth may
16
 need to draw on its RBA overdraft
facility, at an interest charge markedly
exceeding the interest cost of equivalent
Treasury Note issuance.
Interest costs can be minimised if, by
Monday each week, agencies give the
Treasury accurate daily revenue and
expenditure forecasts covering the period up
to Wednesday in the following week, for
incorporation in the week’s borrowing
decision. Reasonably accurate daily cash
forecasts for the next four to five tender
weeks can help to keep tender sizes to levels
that the money market can absorb, and
thereby minimise the Commonwealth’s risk
of paying higher yields on account of less
competitive bidding by tender participants.
Consistently improved accuracy would allow
decisions on the optimal timing of Treasury
Bond issuance and redemptions to be made
in an environment of greater certainty.
17
Where agencies can improve
forecasting performance
The Treasury routinely follows up all
significant forecasting errors in an effort to
identify and remedy systemic problems.
Based on past experience of forecasting
errors, agency performance could be
improved through training that stresses the
importance of the work of processing staff,
and a more thorough approach to
documenting:
• key processes and payment dates so that
agencies are not caught unawares by staff
absences;
• the information flows and lead times in
the making of payments by various
mechanisms;
• implications of state and federal public
holidays and of payment dates falling on
weekends; and
• new administrative arrangements that will
be necessary immediately after
amendments to legislation affecting
significant payments.
If there is continuing uncertainty about the
date of signing funding agreements with the
States and Territories, the Treasury should be
kept informed of developments.
Appendix A
Cash
management techniques

A. Ask yourself some key questions

Answering some key questions can help agencies develop their departmental and
administered cash flow statements optimally:

• accounts receivable scheduling - should agency billings for goods or services supplied
be issued monthly, fortnightly, weekly or at the time of each transaction? How do
agencies determine their credit arrangements and how can these be improved to
improve their cash flows?
• early payment discounts - should clients receive discounts for early payments? Is a
discount offered by a supplier large enough to justify early payment?
• depositing of cash receipts - how should departmental and administered cash receipts
be deposited? How frequently?
• capital planning (for investment) - what are the planned capital acquisitions for the
budget period(s)?
• cash management - what are the budgeted cash receipts and payments for the
budget period(s) and what is the resulting cash surplus or deficit?

B. Forecasting cash flows

Forecasts of cash flow that can help agencies estimate their cash requirements include:

• cash on hand - this figure, normally very small, should be obtained readily from
existing records;
• cash received (expected and actual) - this can be obtained by estimating
appropriations and sales of goods and services, and separately, collections of revenue
on behalf of the Commonwealth; and
• cash used - this can be determined by estimating the timing of agency payments
(such as payroll costs and salary and wage benefits, purchases, taxes, and capital
acquisitions), and separately, administered payments on behalf of the Commonwealth
and their amount.

C. A basic check-list
A cash management plan involves a number of basic checks. These include, but are not
limited to:

• reviewing current cash management arrangements including the monitoring of cash

flows;
• developing and improving the existing budget;
• developing cash flow forecasting mechanisms;
• increasing net cash inflow and decreasing net cash outflow where appropriate;
• making appropriate banking arrangements and evaluating banking procedures;
• improving accounts payable and receivable practices;
• analysing inventory holdings and purchasing practices; and
• reducing the Commonwealth’s costs of borrowing.

18
Appendix B
Options for
Revenue
Collection Mechanisms

Cheques and over-the-counter receipts

Although major savings are possible throughout the financial system from increased
reliance on electronic transactions, in some instances quite large numbers of payments
continue to be mailed or made over the counter. Systems should be designed to ensure
that as much as possible of what is received this way is banked that day.

Cheque payments banked during the day are batch processed overnight and settlement
between banks for the day’s transactions is made the next morning on a net basis:

• amounts paid are credited to agencies on the day of presentation; and

• institutions on which payments are drawn have 48 hours thereafter to dishonour
payments where there are insufficient funds or payment has been stopped.

Cheques are often processed through centralised locked box facilities, operated either by
the agency or under an outsourcing agreement:

• specialised scanning equipment facilitates efficient data capture before the related
banking transactions are processed; and
• there should be sufficient automated processing capacity for virtually all revenue
received on days of peak activity to be banked without delay - if necessary, a very early
start will be made to achieve this objective.

Electronic funds transfer

Agencies obtain same-day value for EFT payments initiated by an authorising

message from a payer’s personal computer, or as a result of direct debit or direct credit
arrangements.

Various proprietary desktop-banking packages have been developed by financial

institutions. Provided that the instructions are sent before daily cut-off times, these allow
clients to transfer funds directly to other accounts for a small fee (instantaneous transfers
of high-value or time-critical payments can be effected for a somewhat larger fee). They
also facilitate more direct management of bank accounts, including reconciliation
functions.

19

Direct credit and debit
Direct credits and debits involve
arrangements between an agency, a payer
and the payer’s financial institution. They are
credited to agencies on the payment date
specified, generally being batch processed
overnight and settled between banks on a
deferred net basis the next morning after an
exchange of electronic files between
financial institutions.
Direct credit is much more common than
direct debit arrangements. The payer
authorises a financial institution to make a
specified payment electronically to an
agency on a given date or dates, usually for
a small transfer fee. No information about
the payer’s bank accounts needs to be
divulged to the agency.
Under direct debit arrangements, the payer
provides an authority for the collecting
agency to make an appropriate debit or
debits from a specific account. The agency
usually incurs the bank charges and is certain
of receiving available funds on the due date,
whereas the payer is certain of avoiding
penalties for late payment.
Entering into agency arrangements
with other organisations
There has been a proliferation of EFTPOS
(electronic funds transfer at point of service)
outlets with distinctive technology for
scanning entries on bills or invoices and
facilitating debit card withdrawals. This has
increased possibilities for agencies to enter
into arrangements with third parties to help
expedite collecting and processing much of
their receipts. Charges and terms of service
vary quite widely in these cases:
• in principle, the sharing of infrastructure
and staff costs among numerous clients
can lead to significant savings in the cost
of collecting revenue; and
• a wide network of over-the-counter out
lets, all with appropriate processing
capability, can provide an additional very
Appendix B
convenient payment choice under an
agency collection agreement.
Often, the information systems of the
collecting organisation are configured in
such a way that reconciliation of all takings
during the day for different clients occurs
only overnight and the exact position is not
known until the early hours of the next
morning. One way of dealing with this
situation is for these funds to be remitted to
the RBA to obtain next-day value for the
Commonwealth (the written approval of the
Minister for Finance and Administration is
currently required for the funds to remain in
another organisation’s account overnight).
Alternatively, on the basis of known
overnight residuals and estimated takings on
the current day, an offsetting transfer could
be made to the RBA before close of business
(in this case, a mix of same-day and next-day
value is achieved, and an agreement about
an appropriate rate of interest on overnight
residuals is needed). Under the agency
banking arrangements to apply from July
1999, the aggregate of deposits made to a
financial institution will have to be swept
daily to the RBA.
In the case of the Australian Taxation Office’s
Billpay arrangements with Australia Post for
collection of a variety of taxation payments,
for some time a proportion of same-day
value for the Commonwealth was achieved
for a premium for each such transaction as
follows:
• all payments lodged are scanned at the
counter;
• payments at predesignated high-value
outlets are reconciled for collection by
courier late in the day and delivered to
a central facility for cheque processing;
and
• settlement of value in the banking system
occurs on the day of payment.
Agencies considering entering into such
incentive payment arrangements should
compare additional interest on average
payments banked one day earlier with the
premium charged for the expedited service.
20

Telephone banking
In 1997 a consortium of 10 banks
introduced a new BPAY payment service that
provides their customers and potentially
others with a convenient way of paying bills
by telephone, personal computer or via the
Internet. As payers are dealing with their
own institution, they do not need to disclose
details of their banking arrangements
to anyone.
An agency taking up this service displays its
unique identification number and the BPAY
logo on its invoices. Provided instructions to
pay have been given within designated
transaction times, funds are transferred the
same day by all participating banks, and
standard records of the payments made by
individual customers are received. This
service has the following advantages:
• every account status is checked before
transfers are made and therefore
dishonoured payments are avoided;
• participating banks attract only modest
processing fees for each transaction they
facilitate; and
• agencies are able to choose the financial
institution with which they wish to enter
into an over-all BPAY price/service
contract.
Electronic kiosks
Electronic kiosks located in areas of high
pedestrian traffic provide a range of digital
information services that can be accessed.
They also have an electronic payment facility
that enables EFT from payers’ accounts.
Matters to be considered include:
• there may be a cut-off time each day for
reconciliation of transactions and transfer
of corresponding value, or value may not
be received until the following day;
• it may be possible to negotiate rent-free
access to space because of the additional
26 Finance Circular 1994/12, Collection of Revenue by Credit Card - Arrangements with the ANZ Banking Group
21
publicity that will be given to places where
such facilities are located; and
• agencies examining such arrangements
need to include capital or rental costs
when assessing whether the expected
inflow of payments justifies their
participation.
Credit card merchant facility
Some agencies may find it advantageous to
collect certain revenue through a credit card
merchant facility that accepts payments
through either electronic terminals or a
paper-based voucher system, and has the
following attributes:
• the service provider processes the
payments and assumes the risk associated
with them, in return for a monthly fixed
percentage of the amounts received;
• there may also be establishment and
facility hire costs (also to be paid from
agencies’ running costs); and
• agencies can set upper and lower limits
on the amounts they will accept by
credit card.
In August 1994, the ANZ Banking Group and
the Department of Finance entered into an
agreement26 in relation to a standing,
non-exclusive offer to all Commonwealth
agencies of a credit card merchant
facility where:
• payments by Bankcard, MasterCard and
Visa card can be accepted;
• funds relating to electronic transactions
can be cleared to an ANZ Bank account
the same day, or to the RBA or other
accounts on the next business day; and
• paper vouchers are the equivalent of cash
and must be deposited to a bank within
three days of any transaction.
This arrangement concludes on 30
September 1999, and thereafter individual
agencies will be responsible for negotiating
their own arrangements.