Treasury Management Value for Money: National Report
May 1996
Reference M 12/96
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Contents
1. Introduction
3. Overall Arrangement for Treasury Management
4. Cash Flow Management
5. Banking Arrangements
6. Investment of Short Term Funds
7. Endowments and Long Term Investments
8. Capital Financing
Annex A Membership of the VFM Steering Group
Annex B A Bank's Perspective
Annex C Recommendations Checklist and Action Plan
In 1993-94 the total annual income of the UK higher education sector was over £9 billion. Cash balances at the end of July 1994 were £1.6 billion. While the level of income at individual institutions varies considerably, most have significant cash inflows and outflows and many also hold significant cash balances. It is essential that institutions have a sound system of treasury management in place to ensure that these funds are managed effectively.
The essence of treasury management is to ensure that the risk of loss associated with investing surplus funds is minimised, whilst the return achieved on these funds is maximised. This level of performance is generally achieved by institutions that have systems in place to accurately control forecast cashflows and have adequate procedures so as to safeguard funds invested.
This report reflects the treasury management practices in a sample of 15 institutions across the higher education sector. The key findings set out in the report include both examples of good practice and areas where practice could be improved. There are also practical recommendations on how good practice might be achieved by institutions.
The report should also be considered in the wider context of the higher education sector in the UK. In the current environment of reduced Government funding, continuing pressure has been placed on higher education institutions (HEIs) to improve the efficiency with which they manage their resources. In addition, treasury management has become more prominent in recent years in the wake of the much - publicised events such as those at BCCI and Barings.
A marginal improvement in treasury management practice by HEIs should help to reduce their exposure to risk of significant financial loss, and could provide the means to secure additional financial benefit. In commending the report to higher education institutions, I hope that executive managers will receive it as a helpful working document enabling them to compare their performance against that of the pilot sites involved in the study.
Professor Tom Husband
Chairman of UK VFM Steering Group
1. Introduction
1.1 Background
During 1993 all UK HEIs were consulted with a view to identifying those areas which would most benefit from a sector wide value for money (VFM) review. Treasury Management was ranked highly by respondents and therefore this study is one of the first reviews to be undertaken as part of the Joint Funding Councils' VFM initiative.
The study has been carried out under the direction of the VFM Steering Group chaired by Professor Tom Husband, Vice Chancellor, University of Salford. The Steering Group was established to oversee and provide strategic direction to the VFM initiative. Full membership of the Steering Group is set out in Annex A. This study, which was carried out as a joint exercise by the Audit Services of the three UK HE Funding Councils, has been co-ordinated by the Scottish Higher Education Funding Council (SHEFC).
1.2 Objectives
The underlying purpose of the study was to emphasise the need for effective treasury management within the higher education (HE) sector. By providing examples of good practice, the study is intended to act as a catalyst and aid to institutions undertaking reviews of their treasury management arrangements.
This National Report is one of two documents which have been produced as a result of this study, the other being a Management Review Guide.
The specific objective of the National Report is to set out the main findings of the study and to highlight examples of good practice identified in the HE sector as well as elsewhere in both the public and private sectors.
1.3 Scope
The study was undertaken at 15 HEIs which acted as pilot sites. Fieldwork at the pilot sites covered the following elements of treasury management:
- overall treasury management arrangements;
- cash flow management;
- banking arrangements;
- management and investment of short term funds;
- endowments and long term investments; and
- financing arrangements.
The pilot sites were selected so as to provide a cross section between large and small institutions and between both old and new institutions throughout the UK.
1.4 Approach
A questionnaire was prepared which covered each element of treasury management identified in 1.3. This questionnaire was then used as the basis by which information was obtained on the treasury management arrangements in place at each of the pilot sites. The questionnaire was completed at the pilot sites between March and June 1995. When the results were collated, it was found that further information was still required, and therefore a supplementary questionnaire was prepared and completed. The results of both questionnaires, together with subsequent analysis and collation of data, provide the study's findings as detailed in sections 3 to 8 of this report.
The Treasury Management Review Guide - the second product of this study- was field-tested at an additional pilot site, (the University of Kent), to further refine the approach before it was issued to the sector.
Throughout the study, both the Steering Group and the project team were conscious of the need to make effective use of existing published material and case studies on treasury management. While it is recognised that, in a number of respects, issues relating to HEIs differ from those facing other public service bodies, there are, nevertheless, many common areas of concern. The project team has, therefore, attempted to identify examples of best practice in both the public and private sectors, with the aim of disseminating advice and information relevant to the HE sector.
1.5 Acknowledgements
The Funding Councils, Department for Education Northern Ireland and the Value for Money Steering Group gratefully acknowledge the following individuals and organisations who contributed to the delivery of this project:
- Pilot Site Institutions
- College of St Mark and St John
Falmouth College of Art
Glasgow School of Art
Napier University
Nottingham Trent University
St George's Medical School, London
The Queen's University, Belfast
University of Wales, Bangor
University of Durham
University of Edinburgh
University of Hull
University of Humberside
University of Leeds
University of Teesside
University of Wolverhampton - Management Review Guide Test Site
- University of Kent
- Chartered Institute of Public Finance and Accountancy (CIPFA)
- British Universities Finance Directors' Group (BUFDG)
- Bank of Scotland
- Technical Panel
- Mr Ian Starkie (Chairman), Staffordshire University
Ms Janice Vale, University of Cambridge
Mr David Blanchard, KPMG
The detailed findings, together with appropriate recommendations, are set out in Sections 3-8. In each aspect of treasury management considered during the review, a number of areas for improvement were identified, particularly in respect of cash flow management and the monitoring and control of investments. This summary brings together the key findings including instances of good practice from the study. In overall terms, the results of the study at the 15 pilot sites were mixed. This outcome, given the diversity of the pilot sites, was to some extent expected.
The key findings are as follows:
In Section 3 of the report which deals with overall arrangements, it was found that the majority of pilot institutions did not have a formal treasury management policy or annual strategy. This situation could be remedied relatively easily by reference to the CIFPA's publication Treasury Management in Higher Education: A Guide. The Guide includes a model treasury management policy statement and matters to be included in the annual financial strategy. In addition, it was also found that institutions tended not to have documented their procedures in respect of treasury management.
Some examples of good practice in relation to cash flow management are identified in Section 4. It was found that those institutions which prepared regular cash flow forecasts and closely monitored them clearly benefited from these procedures. This benefit was to be found through being more able to identify surplus funds accurately and maximise the level of funds available for investment. The standard of cash flow forecasting could be improved in several of the pilot institutions. For example, five institutions did not update or supplement their annual financial forecast to provide timely or accurate cash flow information.
In Section 5, which deals with banking arrangements, it was found that seven pilot institutions had market-tested their banking services within the last five years. All seven reported that a significant reduction in the level of bank charges had been secured, which was directly attributable to the respective tendering exercises.
The average rate of return on the short term investment of surplus funds, as considered in Section 6, was calculated for each site to act as a performance measure. This varied from 5.24% to 6.73% at a time when Base Rate was 6.75%. It was found that the institutions achieving higher rates of interest tended to have a more pro-active approach to treasury management.
The level and standard of monitoring in respect of long term investments, to which Section 7 refers, could be significantly improved. Few pilot institutions formally monitored the performance of external investment managers or used benchmarks to evaluate the rate of return actually being achieved.
Section 8 of the report deals with capital financing. There was a considerable range of financing arrangements in place at the pilot sites, although six had no borrowings. Institutions with some borrowings all had a sound framework for formal decision making, and all had procedures to evaluate available borrowing options, although these were not always formally documented.
A summary of the recommendations is also contained in Annex C, which acts as a checklist enabling institutions to carry out an initial assessment of the performance in this area.