Cashflow Confidence: The Surprising Opportunity For Finance

In an era of considerable challenge (seemingly un-fundable infrastructure deficits, an aging population which will require more services, and a turbulent global environment), many Canadian public sector organizations struggle to cope. The obvious options of raising rates, property taxes, tuition, etc., to generate revenue, or reducing services to control costs, or a combination of the two to address these challenges, are so unpalatable amongst constituents that they are usually non-starters.

Too frequently, we overlook a key asset: cash reserves and investment portfolios. By refining cash management practices, finance teams can significantly boost returns on investments, turning idle funds into a powerful revenue source. This article explores a surprisingly overlooked way to boost investment returns while reducing risk —helping tackle big challenges without having to raise fees or cut services.

Balancing Two Risks

Capital Risk

Investing in volatile assets exposes an organization to an increased likelihood that the initial investment may be lost, in whole or in part. To minimize this risk, public sector entities default to low-risk, low-yield options like short-term deposits. They trade higher returns for greater certainty. This strategy is codified in provincial regulations that limit diversification and emphasize capital preservation. These conservative strategies are mandated by various provincial frameworks:

• Ontario's O. Reg. 438/97, which restricts municipal investments to eligible assets like bonds, debentures, or promissory notes issued or guaranteed by Canada or its provinces. The regulation also enforces a prudent investment standard (Part III), requiring municipalities to adopt written policies that address diversification, liquidity, and risk management, while prohibiting investments in low-rated securities (e.g., below A-low for long-term debt).
• In British Columbia, the Municipal Finance Authority Act enables pooled investments through the Municipal Finance Authority (MFA), providing access to diversified, secure options for local governments.
• In Alberta, the Municipal Investment Regulation (Alta Reg 149/2022) offers additional investment opportunities, with specific provisions for major cities like Calgary and Edmonton, while still prioritizing prudent standards under the Municipal Government Act.

Inflationary Risk

Keeping too much cash in low-yield accounts exposes organizations to inflation risk. A simple example: a capital project budgeted to cost $100,000,000 in 2020 would require $120,000,000 in 2025, even if you only consider Consumer Price Inflation (Inflation Calculator - Bank of Canada). Thus, we “lost” $20 million in purchasing power in 5 years. Now that example assumes the return on our investment is zero. Erosion of purchasing power occurs if the rate of return is anything below the rate of inflation. In today's environment—with Canada's CPI hovering around 2% as of October 2025—a 1.5% yield on cash feels safe but delivers negative real returns.

Thus, to effectively protect public funds, we need to mitigate both risks.

Balancing Risks and Improving Returns

Daily cash flow forecasting stands out as a foundational tool, shifting teams from reactive to predictive management. By anticipating cash needs more accurately, organizations can extend investment horizons and capture higher rates within regulated categories like fixed-income securities issued by Canadian governments. This directly supports the liquidity considerations required under O. Reg. 438/97, s. 7(2), ensuring investments align with an entity's written investment policy (s. 7(1)). Below, we outline two key strategies enabled by this practice, tailored to the realities of public sector teams:

1) Invest for Longer Terms

Finance teams that do not dedicate time to daily cash flow analysis often default to short-term investments, as uncertainty about future cash needs makes longer commitments risky. However, with precise forecasting, entities can confidently allocate funds to longer-term eligible investments, which typically offer higher yields. This approach aligns with provincial regulations that permit such instruments while prioritizing capital preservation, allowing for improved returns without added risk.

2) Minimize Your Cash Buffer

Without robust cash flow analysis, teams tend to maintain overly large buffers in low-yield bank accounts to hedge against unanticipated outflows or delayed inflows. Daily forecasting provides clarity, frequently enabling a reduction in these buffers while still ensuring liquidity. The excess cash can then be moved into even short-term regulated investments, yielding better returns.

A Potential Hurdle - Banking Agreements

Public sector organizations are often bound by banking covenants requiring significant amounts to be held in low-interest accounts to secure favorable loan terms or services. Daily cash flow forecasting provides the data needed to demonstrate stable liquidity, empowering teams to renegotiate these agreements for more flexibility. This could involve reducing minimum balance requirements or shifting funds to higher-yield options within regulatory limits, further enhancing returns.

Real-World Benefits and Examples

The improved return on investment delivered by these strategies can be substantial. Better returns have the potential to add millions to annual income, as demonstrated by entities that improved yields through enhanced forecasting, even under restrictive rules.

Seizing the Opportunity

Improved returns represent a "hidden" lever for fiscal health in Canadian public sector organizations, achievable within regulatory frameworks that prioritize safety and compliance. We urge finance professionals in municipalities, school districts, and higher education to assess their current practices and consider incremental improvements.

By implementing strategic initiatives such as daily cash flow forecasting—reducing buffers, investing excess cash sooner, for longer enhance yields while balancing capital and inflationary risk mitigation—teams can generate additional revenue to assist in addressing pressing challenges like infrastructure deficits and an aging population.

The challenge for most is how to find the time to do this daily work. As you heard Joe Sass from the City of Kelowna say, “what enabled all of this for us was having the people we could put to do this work on a full-time basis.” Often finance is trapped dealing with compliance work and can not prioritize this strategic work.