The Importance of Cash Flow Management in Local Government Finance

^{Written by Joseph Luppino | VP/Government Banking Officer}

The Government Finance Officers Association (GFOA) strongly recommends that governments perform ongoing cash forecasting as a best practice.  Why is this important, and how do you go about it?

Cash flow management is the art of successfully estimating the timing of your local government cash flows.  The Municipal and County CFO needs to understand the historical cash drivers of inflows and outflows and validate the cash flow forecasting models with variance analysis.  Governments CFO’s conduct cash forecasts to ensure sufficient operating liquidity by estimating the available cash deposits, expected inflows, and required disbursements during a given period.

Common inflows include...

1. Property Tax Receipts Current and delinquent taxes

2. Energy Receipt Taxes

3. Federal and State Grants

4. Code Official Fees

5. Interest Revenue

6. Other fines and fees

7. Utility user fees

 Outflows represent anticipated payments such as...

1. Salaries and wages

2. Debt Service

3. Pension and Employee Insurance

4. Other Liability Insurance

5. Payments for goods and services

6. Payments to Local Schools and County Taxes

Governments should also consider, using reasonable assumptions, non-repetitive receipts and payments such as proceeds from bond issuance, capital expenditures or expected legal settlements.

The cash forecast analysis is intended to measure and assess the government’s ability to meet its liquidity needs. Cash forecasting can reduce the need for short-term borrowing or liquidation of long-term investments before maturity in the event of a cash shortfall, and can identify idle funds and determine whether those funds could be invested during that idle time frame.

Utilizing a cash forecast is important to maximize interest income, especially in this current environment of rising interest rates.  In fewer than 16 months, interest rates have increased from 0.50 basis points to over 4%, an almost tenfold increase.  A municipality with an average cash balance of $18 million can earn approximately $750,000 in annual interest income today, 2023 compared to just $90,000 in 2021.  This increase in interest income can help offset increases to insurance, employee fringe benefits and energy costs.   A proactive CFO will be able to manage the budget more efficiently with cash flow forecast.

Cash forecasting also helps governments recognize structural issues that might have a negative impact on their cash positions. When reviewing the entire organization, Counties and municipalities use cash forecasting to coordinate spending patterns and mitigate potential shortfalls by using this information to improve revenue collection practices and align revenues and expense cycles. Cash forecasting is therefore an essential tool for informed management decision making.  

The cash forecast should be based on conservative assumptions about both the cash receipts and disbursement portions of the analysis, and these assumptions should be reviewed and updated regularly, as well after any major changes in operations (e.g., a new debt issuance, new taxes, etc.). 

Components of Cash Flow Analysis…

1. Consider historical information & projected financial activity,

2. Compare actual cash projections to assist with future projections

3. Conservative cash receipts and cash disbursements assumptions

4. Monitor cash positions daily to ensure sufficient liquidity

Assemble your receipts & disbursements in a Cash Flow Forecast utilizing excel or check to see if your accounting system can be programmed to have a monthly cash flow report.  Here is a very basic framework to help you get started:

Start: Beginning cash balance from your audit

Add:  Monthly Receipts (fees, grants, taxes, etc.)

Less:  Monthly Appropriations (salaries, vendor payments, debt service, etc.)

End: Ending Monthly Cash Balance

One final benefit of cash flow projection is that it can also help you detect outflows of unauthorized external fraud such as ACH/Wire fraud, check fraud or cyber security fraud as well as internal fraud such as employee theft of cash and checks, mishandling of invoices, deposits and improper reconciliations and misuse of P-cards and other payables.

In summary, solid cash flow analysis has huge benefits for local governments, and municipal and county CFOs should be conducting them with regularity. Drop me an email and I’d be happy to discuss further how to approach this and what to do with the results.