Published: September 17, 2020
Financial planning and forecasting are essential activities of finance and leadership, and especially so in the age of COVID-19.
The Financial Intelligence Tool’s (FIT) financial health indicators provide “retrospective” measures of financial health based on historic data. However, any government can use these measures to help plan for the future.
Benefits from integrating FIT’s financial health ratios
The typical focus of both budgets and financial plans is to estimate the level of service that can be provided given available resources, often with ending residual cash as the “bottom line.” Essentially, these plans say, “We can provide all these services and still maintain cash in the bank.”
But what if a financial health ratio was used as the bottom line?
The Government Finance Officers Association (GFOA) suggests just that, using these ratios as a way to monitor a budget or long-term plan’s performance. The GFOA states, “A [financial] plan should include an analysis of the financial environment, revenue and expenditure forecasts … and plan monitoring systems, such as a scorecard of key indicators of financial health.”
For example, if revenue projections in a scenario for the next two years call for a 5 percent decrease, how would this change a fund’s cash balance sufficiency, a measure that calculates the amount of days a government could survive on cash alone? If the scenario results in days of available cash reducing from 75 days down to 40 days, this could be more useful than simply depicting that the fund would have $200,000 left. Residual cash matters more when placed into the context of sustainability.
Often, financial ratios are used as a scorecard. You can thus use them to estimate future measures of financial health, based on various plans, scenarios, etc.
If you’re new to FIT or would like information on how to use FIT, check out our previous post about FIT personal trainers and the 15-Minute FIT tutorial. Keep your eye out for more tips, tutorials, and feature announcements about the next version of the Financial Intelligence Tool.
More financial planning posts
If you haven’t already, check out our other articles in this series:
- What’s the scenario? Financial planning in uncertain times: sao.wa.gov/whats-the-scenario-financial-planning-in-uncertain-times/
- Look to the future: Cash forecasting is key to strong internal controls: sao.wa.gov/look-to-the-future-cash-forecasting-is-key-to-strong-financial-controls/
- GFOA — “Long-Term Financial Planning”: www.gfoa.org/materials/long-term-financial-planning