Published: June 17, 2020

It is critical to forecast your cash inflows, outflows, and balances into the near-term future to anticipate liquidity shortfalls and remain solvent. Annual budgets tell you your spending authority for a year, whereas a cash forecast will tell you whether you have sufficient cash in the future on a month to month (or even daily) basis.

Why do it?

Cash forecasts:

  • Provide information for leaders to make informed financial decisions
  • Demonstrate the government has solid financial controls and is well-managed
  • Identify shortfalls early so you have the most options available to mitigate the concern
  • Inform investment decisions, both buying and selling, to maximize interest earnings and maintain liquidity
  • Plan for anticipated future cash needs, such paying for large purchases

Finding a ready-made tool

You can easily use a simple spreadsheet for this purpose, even though more sophisticated tools are available. If you want to borrow a tool to get started, you might check with a peer government or find one available through an association. For example, some educational service districts have a forecasting tool that they share with their school districts.

The Government Finance Officers Association (GFOA) has developed some sample models you can use and download for free. They have a simplified cash flow model as well as a super simplified model, which is similar but exists on a single worksheet and allows for more modification.

Download the GFOA models and view a training on this topic:

gfoa.org/managing-cash-flow-crisis-how-quickly-build-working-cash-flow-model

Learn how to use the GFOA models by watching this short tutorial:

www.youtube.com/watch?v=0joXZXoS5as&feature=youtu.be

Dealing with uncertainty

To forecast, you need to project what the future is expected to look like. This involves using conservative estimates – your best guess prepared with caution. If there is a high degree of uncertainty and you don’t feel comfortable with any one estimate, then running forecasts using different estimates (or assumptions) can be a valuable exercise. For example, you might be comfortable estimating that sales tax will decline 10 percent over the next three months. Alternatively, if you feel less certain and there might be a chance of, 15, 20 or 30 percent decline, run those forecasts too. We’ll have more information on this soon in a future article, so stay tuned!

What time horizon to use

You’ll want to plan a reasonable period into the future. Some say this should be as far out as you can reasonably predict, while others say at least six months. GFOA recommends at least a rolling 12 months into the future – this means you always have a full year projected at any time. To see what GFOA has to say on this topic, go to:

GFOA best practices: Using Cash Forecasts for Treasury and Operations Liquidity

www.gfoa.org/using-cash-forecasts-treasury-and-operations-liquidity

Keep it up to date

You’ll want to revisit your forecast regularly and keep it up to date. Work with departments to understand how their projects might affect your estimates. The situation is fluid right now, and you’ll want to stay on top of how any new information might affect the estimates and assumptions you used in your forecast.

What if cash runs short?

If you identify shortfalls, start planning early for how you will address them. For a GFOA resource that helps you identify options (and consider potential pitfalls), check out:

Cash is King: Short-Term Strategies to Slow the Flow of Money Out the Door and Keep the Budget Balanced

gfoa.org/cash-is-king

Additional resources

For a variety of resources on budgeting, financial planning, and fiscal health from GFOA, see:

gfoa.org/fiscal-first-aid

Do you need further assistance?

Remember, we are here to help. We have financial management specialists at the Center for Government Innovation available to talk you through technical projects. Reach out to the Center@sao.wa.gov. You can also contact us with specific questions, using our helpdesk service.

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