Optimizing Funds with Cash Flow Forecasting: By Involving Operating Departments in Planning and Prioritizing Organization-Wide Spending in Light of Cash Receipts, Governments Can Avoid the Costs of Short-Term Borrowing And/or Liquidating Long-Term Investments

Article excerpt

In a study published in the August 2003 issue of Government Finance Review, 51 percent of the government finance professionals surveyed indicated a need for further developing their forecasting skills. Among the most important applications of forecasting skills is estimating cash receipts and disbursements for one or more periods. Cash flow forecasting is a tool used by local governments to avoid problem situations and otherwise enhance the responsible stewardship of the public's resources. GFOA offers practical guidance on cash flow forecasting in a newly adopted recommended practice--Use of Cash Flow Forecasts in Operations.


Cash flow forecasting is important for local governments on two fronts: (1) to ensure proper liquidity levels are available to meet liabilities and (2) to maximize dollars available for investment. Without a picture of its expected cash flow position, a government may fall into the trap of blind spending. By blind spending, I refer to the practice of spending without regard for the drain on cash flow. Blind spending often leads to cash shortfalls and increased costs, either from having to borrow money to pay bills or from foregone interest earnings. Missing payroll in one month because of the purchase of a few squad cars in the previous month happens. It happens because the government did not have a handle on its cash flows. But even the most accurate cash flow forecast is worthless if the organizational units are not willing to adhere to established parameters on the timing of expenditures.

It was in this light that GFOA's Committee on Cash Management took on the task of developing a recommended practice on cash flow forecasting. Given the wide variety of organizations GFOA serves, it is possible that smaller units of government will benefit most from guidance in this area. Some organizations cite complexity as a reason for avoiding cash flow forecasting, along with being overwhelmed by day-today operations and the sheer volume of financial data. The recommended practice sets forth concrete measures that allow an organization to frame how a forecast is developed and used, thus allaying barriers such as complexity, data overload, and relevance. The following is a snapshot of the guidance in the recommended practice:

* Forecasting cash flow must be done on an organization-wide level

* The prioritization of expenditures is a function of the organization's goals

* Forecast timeframes need to accurately reflect the receipts of the organization

* Use historical data to measure activity of a cyclical nature, both for receipts and disbursement

* The forecast of receipts should include cash and both short- and long-term investments

* The forecast of disbursements should recognize the organization's priorities in light of statutory regulations on prompt payment

* Cash forecasters should recognize the items and controls that influence the organization's float, and develop strategies that favor the collection of receipts as soon as possible and the delay of disbursements for as long as possible

* Forecasts should leave room for error


For the City of Warrenville, Illinois (population 13,363), the use of cash flow forecasting has had concrete and demonstrable benefits. In the past, departments would aggressively pursue their spending plans as soon as the budget year began. This meant that the departments were submitting purchase orders for large capital items like police cars, computer systems, and public works vehicles at precisely the same time the city was being invoiced for summer roadwork and construction improvements. The strain on the city's concentration account was acute, and could only be relieved by pulling resources out of investments to meet the cash demand.

A similar cash drain would occur at the end of the fiscal year. …


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