Fiscal First Aid Quick Reference - Government Finance Officers ...

Fiscal First Aid Quick Reference
Develop Cash Flow Reporting.
By Sofia Anastopolous, Vice President, Client Service, Chandler Asset Management, and
Michael E. Bailey, Finance Director, City of Redmond, Washington
Introduction
Cash flow forecasting is an estimate of cash sources and uses, and the resulting balances, during
a given period (daily, weekly, monthly, annually). This forecast measures the organization’s ability
to meet its liquidity needs and provides early warning of unfavorable trends.
Cash flow forecasting can determine what dollar amount of the portfolio needs to remain liquid to
meet disbursement obligations, generally within a six-month period. Also, it can identify core
funds, or those funds available for longer-term investing. For instance, cash flow forecasts can
help identify reasonable maximum and weighted average maturities of investments.
Cash flow forecasting should be done throughout the organization. This allows the jurisdiction to
coordinate spending patterns and balance the flow of funds.
In a financial crisis, cash flow reporting takes on renewed importance. Cash is critical for shortterm
operations. It pays the salaries and rents, and buys the equipment, supplies, and tools.
Governments in a financial crisis should develop monthly and perhaps even weekly cash flow
forecasts.
Steps to Take
I. Gather information from several sources:
A. Monthly financial statements, bank statements, accounts payable and receivable
information, and any other historical information related to cash transactions. This
information gives historical data and can help identify peaks and valleys in cash flows.
B. Current budget, which provides information on future revenues and expenses and can
identify potential deviation from historic patterns.
C. Capital projects and their estimated draw schedules.
D. Current debt service.
E. Investment activity, including maturities and interest payments. The timing can help
match maturities to disbursement obligations.
II. Use the above information to predict upcoming receipts and disbursements, and plan future
investments and borrowing requirements.
A. Revenue items should be limited to four or five major sources, with additional revenues
lumped together as “other.”
1. Prepare a monthly schedule of prior receipts.
2. Then calculate a simple three-year average.
3. Use this average to determine the percentage of each revenue source contributes to
the total.
4. Adjust these percentages for any planned changes in timing or amount. This is
important during economic slowdowns, when abrupt shifts in sensitive revenues and
expenditures can wreak havoc on historical trend information.
B. Prepare expense or disbursements the same way as revenues.
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Fiscal First Aid Quick Reference
Develop Cash Flow Reporting.
1. Categorize expenses by major type such as payroll, utility payments, debt service
payments, capital expenditures, materials and supplies, and other vendor and
miscellaneous payments.
2. Prepare a monthly schedule of historical disbursements.
3. Calculate a three-year average.
4. Adjust for anticipated variations and trends.
III. Use forecast revenues and expenses to create a cash flow forecast.t
IV. Include all available cash and investments in the beginning balance.
V. Add expected receipts to the beginning balance and subtract expenses.
VI. The result will be the net cash position, which determines what course of action to take.
Excess cash should be invested to maximize investment income. Deficit balances may
require short-term financing.
Applications of Cash Flow Reporting
Managing financial stress. Organizations can use cash flow forecasts to identify current liquidity
issues and trends that may develop into problems in the short-term or even in the long-term. .
Sizing fund balance. Cash flow helps identify working capital needs. Cash flows that are volatile
and have wide variance between high and low points for given periods may suggest a need for a
higher working capital reserve.
Communication tool. Cash flow forecasts can help illustrate the reality of an organization’s
liquidity situation. Such communication can prove valuable when dealing with stakeholders
(elected officials, rating agencies, taxpayers, and constituents).
Investment management. In normal interest rate environments, longer maturities typically have
higher yields. With the information garnered from a reliable cash flow forecast, a government can
identify what dollar amount of the portfolio needs to remain liquid to meet disbursement
obligations, and it can identify those funds available for longer-term investing.
Evaluation
• Reliable cash flow forecasting is key to prudent financial management.
• Cash flow forecasting is essential in a financial crisis.
• Cash flow forecasts can provide early warning signs of liquidity problems.
• Cash flow forecasting helps diagnose imbalances in sources and uses and can highlight
patterns that might affect long-range financial position.
• Cash flow forecasting can provide information to help manage liquidity problems.
• Cash flow forecasts can help officials take prompt corrective action and plan for
contingencies (accelerate revenue collections, reduce expenditures, make informed
decisions about short-term borrowing).
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Fiscal First Aid Quick Reference
Develop Cash Flow Reporting.
Resources
o Shayne C. Kavanagh and Christopher J. Swanson, “Tactical Financial Management:
Cash Flow and Budgetary Variance Analysis,” Government Finance Review, October
2009.
o Erik W. Bush, “Optimizing Funds with Cash Flow Forecasting,” Government Finance
Review, August 2005.
o Michael E. Bailey, “Do You Know Where Your Cash Is?” Treasury Management
Newsletter, February 2010.
o Michael A. Gallanis, “Cash Forecasting for the Public Sector,” Treasury Management
Newsletter, July 2003
(http://www.estoregfoa.org/StaticContent/staticpages/PI0703.html).
o GFOA Best Practice: Use of Cash Flow Forecasts in Operations (2005 and 2008)
(http://www.gfoa.org/downloads/CashFlowsFINAL.pdf).
o David P. Higgins, Essentials of Treasury Management (Bethesda, MD: Association
for Financial Professionals, January 2005).
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