Keeping the Lights On: Managing Your District’s Cash Flow

Often, when budgets and financial performance are evaluated, fund balances and changes in fund balance are scrutinized. But to keep the lights on and the vendors paid on a regular basis, it’s critical to look beyond the fund balance to understand and manage the cash flow needs of a district.

The Intersection of Cash Flow and Fund Balance

A district’s cash flow and the fund balance reported on its financial statements reflect two different metrics for a specific period of time. Cash flow represents the ability of an organization to pay the obligations on time, the other is a sign of overall financial stability and health.

For most people, a relatable comparison would be managing your current bank balance while paying monthly bills, compared to evaluating your overall net worth. One is a short term view, the other is long term. While the two are distinctly different, it is important to understand the impact of spending cash on the composition of fund balance.

For school districts, fund balances may be more visible, but managing cash is just as critical, and often underappreciated.

Understanding and being able to effectively communicate the difference between fund balance and cash flow can go a long way towards raising awareness of the importance of cash flow. These key points may be helpful to elaborate:

The amount in a district’s fund balance doesn’t mean your district has that much cash on hand.

One of the most important concepts for a school board and the public to understand is that a district’s fund balance is the difference between a district’s assets and the liabilities, and the changes to the fund balance result in a difference of revenues and expenditures. Fund balance can be made up of several classifications of fund balance that you may not be able to immediately spend.

The Governmental Accounting Standards Board, or GASB, has established these five categories for fund balance in GASB 54:

• Nonspendable balances are not expendable or are legally or contractually required to be maintained intact.
• Restricted balances can be spent only for the specific purposes stipulated by the Texas constitution, external resource providers or enabling legislation. These restrictions are external, as opposed to committed balances, which a district constrains by its own choice.
• Committed balances include amounts that can be used only for the specific purposes determined by a formal action of the government’s highest level of decision-making authority.
• Assigned balances are amounts intended to be used by the government for specific purposes but which do not meet the criteria to be classified as restricted or committed.
• Unassigned fund balance is the residual classification for the government’s general fund and includes all spendable amounts not contained in the other classifications.

The actual cash in the bank may be attributable to a portion of each one of these categories of fund balance, but the total of the fund balance could be related to other non-cash assets. The key is knowing the cash and non-cash makeup.

Effective cash flow management is critical to maintain continuity of operations.

Even with a strong fund balance, if cash flows are not managed well, a district may not have the cash on hand to be able to make payroll or pay invoices.

Every district should have a cash forecasting model that can be updated regularly to include timing of inflows and outflows. School districts have elements of their cash flows that are very predictable and can be estimated with some reasonable certainty of accuracy.

Inflows of property tax revenues from the county tax offices occur at similar rates from year to year, and the amount of tax revenue can be estimated using information from the property tax values. Further, large portions of district cash outflows, such as payroll and benefits, can be estimated for both the value and timing of the payments. Other revenues and expenditures can be estimated with less accuracy, but can still provide the district with a reasonable expectation of when cash will be needed for operations.

At a minimum, a cash flow model should provide easily accessible and time sensitive information about cash on hand to understand timing of revenue and cash into a district as compared to the timing and needs of the district to pay its employees, invoices and other obligated expenses.

The decisions made by the district that effect the timing and amount of revenues and expenditures have an impact on fund balance and the changes to fund balance from year to year. Without a doubt, cash flows have an impact on fund balance, but the decisions made about how to use the cash are critical to the changes in fund balance. The management of cash flows is what allows a district to continue operations and keep the lights on.

Conclusion

Managing the intersection between fund balance and daily cash flow is an ongoing challenge for all school district budget officers. External forces and events can make accurately predicting cash flow needs difficult, and fund balances can provide a critical safety net when cash flow needs arise. But, understanding that fund balances do not directly reflect the cash on hand is critical to ensure that there are funds available when they are needed to meet the day to day operational needs of the district.

For more information, contact us. We’re here to help.

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