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Financial Management

Managing Cash Flow

Introduction

"Cash flow management" is the planning and managing the flow of income and expenditures so that money is always available to conduct business as intended and needed. It requires an understanding of how much money is available at any point in time, of when money is going to be received, and of how to schedule purchases and activities.

Narrative

Municipalities receive and spend money over the course of a fiscal year. Money coming in and going out is referred to as “cash flow”. Some expenses are paid at regular intervals throughout the year (e.g. monthly telephone bills, semi-monthly payroll for regular employees). Other expenses occur seasonally (e.g. summer construction season), in large lump sums (e.g. annual insurance premium, annual fuel delivery via barge), or unexpectedly. Just like expenses, income does not flow into the municipality evenly throughout the year. Some revenue, such as Community Revenue Sharing funds, are received in lump sums once or twice a year. If money is not available when needed, the municipality may have to postpone work or purchases, borrow money, or pay penalties and fees associated with late payment: in each of these cases, the inability to pay in a timely manner results in higher costs, and can create serious problems

As an example, many communities receive their annual fuel supply via barge during the summer: this requires a large lump sum payment. If the community has not planned ahead to have cash available for this major purchase, it may have to spread the delivery of fuel out over the course of the year. Much of the fuel will then have to be delivered by air, at higher cost, with higher risk of major damage if a delivery is not made on time during the winter.

In order to make purchases when needed, conduct activities as planned, and avoid costs, penalties, and problems associated with late payment, municipalities must be able to pay expenses in a timely manner.

Frequently Asked Questions

How do I plan cash flow management?

To plan cash flow management, you should prepare a cash flow budget at the beginning of each new fiscal year. The first step is to identify the amount of cash carried over from the previous fiscal year. You will need to identify how much of the carry-over cash is:

  • restricted to specific purposes, such as grant projects, matching grant requirements, loan repayments, employee's accrued leave, etc.;
  • set aside for renewal and replacement of equipment and facilities, and for contingencies and emergencies; and
  • unrestricted (available for any authorized expenditures).

The next step is to develop a month-to month cash flow budget that shows how much cash will be available each month. This budget should show:

  • how much income you expect to receive each month;
  • how much expenses you expect to pay each month; and
  • how much you expect to deposit into, or pay out of, the renewal and replacement fund and other reserve accounts each month.

By identifying the amount of cash available each month, you can determine when large expenditures are needed, and you will be better prepared to schedule activities and purchases effectively to avoid shortfalls, delays, and problems.

What is a cash flow statement and how often should one be provided?

In its simplest form, a cash flow statement shows the change in cash balances for a specific reporting period, including the starting cash balance, cash received and spent, and the ending cash balance. It can also include information about cash needs and anticipated revenues and expenditures. To manage cash flow effectively, a cash flow statement should be provided each month.

How does cash flow relate to grants management?

Grants are usually cost reimbursable: this means you must pay grant expenses and submit an expense report before receiving reimbursement. If you do not have funds on hand to pay the grant expenses, you may need to delay grant-related activities and purchases. Such delays can result in higher costs and can even jeopardize the grant project.

When spending large amounts on grant activities and purchases, the expense reports and requests for reimbursement must be submitted promptly in order to pay subsequent expenses in a timely manner.

For example, a municipality spent nearly $60,000 on a grant project, but did not submit its grant expense reports and requests for reimbursement. Without the reimbursement, there was little money left in the bank. By the time reports were finally submitted and reimbursement was received, the city's checking account was overdrawn and the city was delinquent in paying bills and tax deposits. With no money in the bank, repairs to the city's heavy equipment were delayed, and the grant project was temporarily shut down.

Effective cash flow management requires that you have enough cash on hand to pay the grant expenses as well as your usual operating expenses and even unexpected expenses until the grant reimbursements are received.

Additional Resources

Publications:

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Sample documents:

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Recommended web site search topics:

  • Managing cash flow
  • Cash flow budget
Applicable Laws and Regulations

Alaska Statutes

  • AS 29.20.390 Municipal treasurer.
  • AS 29.20.500(3) Prepare and submit annual budget.
  • AS 29.20.500(4) Make monthly financial reports.
  • AS 29.35.010(4) Municipal reports.
  • AS 29.35.100 Budget and capital program.
Revised 12/31/2014