Using Cash Forecasts for Treasury and Operations Liquidity

Governments 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 tax receipts, bond proceeds, utility payments received, grant revenue, other revenue from fees and penalties, and maturities and interest revenue from investment securities.   Outflows represent anticipated payments such as debt service, employee payroll and benefits, payments to vendors for goods and services, and purchase/roll over of investment securities. Governments should also consider and include non-repetitive receipts and payments such as proceeds from bond issuance, capital expenditures or expected legal settlements, using reasonable assumptions.

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.

Cash forecasting helps governments recognize structural issues that might have a negative impact on their cash positions. When looking at the entire organization, governments 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.).  An appropriate tool for conducting the cash forecast should be selected; most governments can complete a forecast 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.

The cash forecast should be updated periodically by staff to ensure sufficient liquidity and actual cash flow results should be compared with the cash forecast projections. The cash forecast report should be frequently reviewed by finance management and a summarized report could be included in the periodic investment report.