Part I
Financial Information and Analysis

Cash Flow Management: Challenges

In previous years, OCHA has experienced difficulties in meeting its financial obligations at the end of the calendar year – in particular because of the statutory requirement to have enough cash available at that point to cover staff contracts and operating costs for 12 months of the following year. In 2006, it was able to raise 86 per cent or US$ 115.2 million against its revised requirements of US$ 133.5 million.

OCHA’s cash flow management was made easier in 2006 by continued unearmarking contributions from donors. There was also some improvement in the time lag between pledges and receipt of contributions, and a more even flow of contributions through the four quarters compared to previous years. This allowed for greater flexibility in the allocation of funds to under-funded activities. These improvements, together with the overall increase in donor support in 2006, were greatly appreciated by OCHA and reflect the good partnerships developed with donors over the last few years.

Earmarked, Unearmarked and Loosely Earmarked Contributions

The degree to which contributions are earmarked by donors affects the manner in which funds can be used. Earmarked contributions do not allow resources to be channelled to where they may be most needed. Excess funds from generously funded programmes, when earmarked, cannot be used for other activities that are under-funded. The implementation of activities can be delayed or prevented by the unavailability of unencumbered cash resources.

In 2006, donors contributed US$ 52.6 million (43 per cent) of their funding unearmarked or only loosely earmarked and in line with OCHA’s priorities – helping to improve equitability in funding between field offices and project activities. US$ 71 million (57 per cent) was received earmarked, including US$ 14.3 million in pooled funding – an increase in the earmarked proportion of funding from 51 per cent in 2005. However, if pooled funding is separated from the equation, the results are 51 per cent earmarked against 49 per cent unearmarked – which reflects the levels reached in 2005.

>> Earmarking and Unearmarking Trend 2003–06
Graph: Earnmarking Unearnmarking Trend 2003-06

Timeliness of Contributions

There was considerable improvement in the timeliness of contributions compared to 2005, with a much more even flow of funds overall for the four quarters. While this is an important achievement, it does not necessarily apply to the individual trust funds; in particular, most of IRIN’s funding was received in the last quarter of the year.

>> Timeliness of Contributions to OCHA’s
     Trust Funds (Consolidated)

Timeliness of Contributions to OCHA's Trust Funds (Consolidated)

This graph, in which the contributions to OCHA’s main trust funds are consolidated, demonstrates the more even distribution of funding through the year, although donors are encouraged to continue efforts to provide more timely funding and to increase the proportion of contributions transferred during the first half of the year to 75 per cent.

While regular budget funds are made available at the beginning of every year, extrabudgetary funds are only available for use upon actual receipt of cash contributions – not at the time the contributions are pledged. The timely receipt of contributions is therefore critical for effective cash management. Late receipt of funds results in delayed implementation of activities, or interruptions to activities underway. Unpaid pledges, while recorded as income, cannot be used until the cash contributions are actually received, so the time lag between pledges and receipt of donor contributions should be minimized.

United Nations Financial Rules and Regulations

United Nations financial rules and regulations govern cash flow management. The financial groundwork for annual programming of extrabudgetary activities must commence in the last quarter of the prior year with the preparation of cost plans showing overall requirements for the following year and distinguishing between authorized staffing and operating requirements. Staff costs tend to comprise the major component of OCHA’s cost plans due to its mandate as a coordinating entity. To allow for timely renewal of staff contracts, United Nations rules stipulate that funds to cover salaries for the following year must be available by November of the previous year.

OCHA’s management of cash resources is affected by the financial obligations it raises during the year. Under United Nations rules and regulations, expenditures over US$ 2,500 require the establishment of financial obligations setting aside the full value of the projected expenditure, which cannot be used for other purposes until the obligations are liquidated. In the field, where the bulk of OCHA’s financial obligations exist, the situation is more complex: given the inevitable delays in financial reporting from the field, funds set aside for obligations remain encumbered for a longer period before they can be released for use in the implementation of activities.

The funding of activities detailed in OCHA in 2006 is also governed by the maintenance of operating reserves– set aside to meet final expenditure and liquidation of liabilities for trust funds and calculated as a percentage of estimated annual commitments. The level of operating reserves required by the United Nations is set at 15 per cent, however OCHA has been allowed the exceptional rate of 10 per cent. Only unencumbered cash after this provision is made for operating reserves can be used for programming.

Cash flow problems are most evident in the last quarter of the year, when OCHA commences its annual programming of activities for the following year. At this time it must set aside the cash resources needed to meet its statutory and management obligations for the next year.

Cash Flow Management in 2006

Cash flow management continues to be fundamental to the successful implementation of OCHA’s activities– ensuring that operations continue with minimal interruption, that funding is readily available to address new or deteriorating crises, and that surge capacity can be promptly deployed.

Close monitoring of resources was achieved through the maintenance of cash flow statements and regular reviewing of budgets and expenditure. In working towards better management of resources, options for procurement are being reviewed, especially for vehicles where the cost of leasing is being compared to purchasing for short-term activities; this would reduce the amount of funds required at the onset of disasters. The encumbering of funds based on projected expenditure is also being reviewed to ensure that projected costs more closely reflect amounts that will actually be incurred, and that reporting by UNDP is received and processed in a more timely manner to allow adjustments to be made and more funds to be released during the year.