Frequently Asked Questions
Managing cash flow is planning for and managing money in and money out over an extended period. Managing cash flow requires that a municipality understand when money is going to be received and when it will be needed to cover large expenses. The goal of cash flow management is to develop a plan to keep enough money in reserve to cover payments when they are due. This is sometimes difficult since large amounts of money may not be received at the same time that large payments are due. Just like expenses, revenues do not flow into a municipality evenly throughout the year. Some revenue, such as State Revenue Sharing, is received in a large amount once or twice a year. Some of the relatively large payments, which are due in lump sums, represent a considerable share of a municipality's revenue. If some money is not set aside to deal with these expenses the municipality may have trouble paying bills when they are due.
As an example, purchasing heating fuel for a small rural community requires a large outlay of cash at one time. It is more economical to buy fuel from suppliers using fuel barges; however, the fuel barges can only deliver fuel a few months of the year. If a municipality has not planned ahead to have cash available for this once a year purchase, it may have to pay higher costs to fly fuel in throughout the winter. This will result in very expensive heating costs for public buildings and facilities and increase the cost of providing public services.
How do I plan cash flow management?
To plan for and manage cash you need to budget for the timing of revenues and expenditures. A cash flow budget requires identifying expected revenues and expenditures and when they will happen during the fiscal year. The cash flow budget should be prepared at the same time as the general budget. Preparing a cash flow budget involves the following steps:
Why is managing cash flow important?
Understanding and planning for the timing of the flow of cash into and out of your organization is important to assure you have the cash on hand needed to pay bills as they come due. For example, if you receive your fuel order once a year by barge and the cost is $50,000.00 delivered to your community (FOB), you need to set funds aside and make sure they are available for this use at the time the barge delivers fuel. Planning ahead for this through the budgeting process is especially important, since you must have cash on hand to pay the bill when it is due and to avoid problems with your suppliers as well as possible late payment penalties.
How does this relate to grants management?
Grants are usually cost reimbursable. This means you first need to have money available to begin the project and handle expenses until grant reports are submitted and reimbursed. Planning ahead is important to assure you have a supply of cash on hand to cover the up front costs of the grants you are running.
If it is necessary to have cash available for up front grant costs, won't this impact municipal operations?
In addition to having funds on hand for grant operations, you must have funds available for the usual day-to-day operations plus a reserve of cash available for emergencies or unexpected expenses. For example, if your organization's heavy equipment breaks down, you may need to pay for a qualified mechanic to fly to the community and freight in replacement parts and equipment. Without some reserve cash you might have to shut down municipal services or projects until you have the money to pay for the repairs.
To be successful an organization must manage its cash and plan for the timing of revenues and expenditures. As mentioned above, the starting point is a cash flow budget that serves as a plan for covering obligations as they become due. After the budget is prepared, prepare a cash flow statement each month to see how well the plan established in the budget is working.
The cash flow statement is organized into four parts:
See the Additional Resources section below for a sample Cash Flow Statement. The cash flow statement should clearly identify possible problems with meeting future costs. The statement will identify the need for adjustments to the original cash flow budget. Management should be able to anticipate future problems before they are a reality.
In summary, the person or persons responsible for managing the finances should be required to provide the governing body and the public with cash flow information as part of the monthly financial report to keep everyone informed of cash flow indicators that affect operations.
The Alaska Department of Community and Economic Development, Division of Community and Regional Affairs provides training on-site in local communities and upon request and through regional workshops.
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