Managing Cash Flow

Revised March 31, 2014

Introduction

Municipalities receive and spend money over the course of a fiscal year. The activity of 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, is 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.

Narrative

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

For example, if a municipality knows that it must purchase its annual fuel supply by early September, it should not place all its available cash in certificates of deposit that mature in December. It should also make sure that all necessary documents have been submitted in order to receive available community revenue sharing funds before the fuel is delivered. If necessary, it should postpone or cancel lower priority purchases or projects, or even apply for a bulk fuel loan, to assure that fuel is delivered on time.

Frequently Asked Questions

Applicable Laws

  • 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

Training:

  • The Alaska Department of Community and Economic Development, Division of Community and Regional Affairs provides training on-site in local communities upon request and through regional workshops