Governments conduct cash flow analysis to estimate available cash deposits, expected inflows, and required disbursements during a given period so they can ensure sufficient liquidity. Common inflows include tax receipts, bond proceeds, utility payments, grants, other revenue from fees and penalties, and maturities of all securities held in investments that will mature during the forecast time frame. Outflows represent anticipated payments such as debt service, employee payroll or benefits, and payments to vendors for goods and services anticipated during the forecast time frame. Governments shoulds also consider and accommodate non-repetitive payments such as capital expenditures or expected legal settlements, using reasonable assumptions.
The analysis is intended to measure and assess the government’s ability to meet its needs, to negate the need for any short-term borrowing or liquidation of long-term investments before maturity, and to identify any idle funds, and the duration of that idle period, to determine whether those funds could be invested over that time frame. Cash flow analysis can also help governments recognize issues that might have a negative impact on their cash positions. When looking at the entire organization, governments can use cash flow analysis to coordinate spending patterns to mitigate potential shortfalls by using information to improve revenue collection practices. Cash flow analysis is therefore an essential tool for informed management decision making.
GFOA recommends that governments perform ongoing cash flow analysis to ensure that they have sufficient cash liquidity to meet disbursement requirements and limit idle cash. When conducting a cash flow analysis governments should:
- Create a pooled portfolio of unrestricted operating funds across all government funds, creating one pot of money that will be available for all routine operating obligations. This allows cash flow to be analyzed more efficiently. A government might need to exclude unspent bond proceeds or other similarly restricted funds from its cash flow planning analysis, depending on the timing and purpose of their use.
- Consider historical information and projected financial activity, which are critical to developing and maintening the cash flow analysis process. Historical information, which can be derived from banking or financial system reports, is particularly useful if a given government’s cash flows are predictable over time. Prospective information (e.g., a subsequent year’s budget or the amortization schedules associated with new debt issuance) can help the analyst anticipate deviations from the historical norm.
- Compare actual cash flow results with projections and determine the reasons for those differences in the analysis. The precision of cash flow analysis depends on a government’s size and complexity, and the size of its cash liquidity position, but adding this step will help make future analysis more accurate.
- Make conservative assumptions about both the cash receipts and disbursement portions of the analysis, and update these assumptions regularly, as well after any major changes in operations (e.g., a new debt issuance or at the beginning of a fiscal year).
- Monitor cash position daily to ensure sufficient liquidity. The accuracy of the cash flow forecast should be evaluated at least quarterly, and if any adjustments are needed, they should be made at this point. No forecast will be 100% accurate, and governments should weigh the amount of effort these evaluations require against any expected improvements in the model. A simple model often works best; consider making the model as straightforward as possible (while maintaining the reliability and precision of information needed for makingappropriate management decisions).
- Select an appropriate tool for conducting the cash flow analysis. Many governments can complete an analysis using simple spreadsheet software, while organizations that require more complex modeling can use commercially available analytic or business intelligence systems, or modules found within common enterprise resource planning (ERP) or financial management systems.
An effective cash flow analysis should also encourage the government to communicate decisions that could affect cash inflows and outflows (e.g., decisions regarding legal settlements, changes in revenue collections, or significant milestones for capital projects) to the responsible parties so they can ensure sufficient cash liquidity.