2018 APRIL TAMCAR. Cash Flow Forecasting 4/2/2018

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2018 APRIL TAMCAR Cash Flow Forecasting 1 What Is Cash Flow Forecasting? 1. A method for turning next years budgeted revenues into projected cash inflows.

When combined with beginning available cash, a monthly cash flow forecast is enabled. 4.

1 2018 APRIL TAMCAR Cash Flow Forecasting 1 What Is Cash Flow Forecasting? 1. A method for turning next years budgeted revenues into projected cash inflows. 2. A method for turning next years budgeted expenditures into projected cash outflows. 3. When combined with beginning available cash, a monthly cash flow forecast is enabled. 4. This will pinpoint, to the month, when (if) cash flow is expected to be negative. 2 What Can Cash Flow Forecasting Accomplish? It should show problems with a city's liquidity. A balanced budget may still leave a city with a liquidity problem. 3 1

It does not provide a solution to any cash liquidity issue. 3. It does not make the governing body do anything. 4.

2 What Can Cash Flow Forecasting Accomplish? It should indicate when a city will need additional revenue which could come from: a. New debt b. New grant c. New revenues d. Converting a CD or investment to cash 4 What Can Cash Flow Forecasting NOT Accomplish? 1. It provides no cash. 2. It does not provide a solution to any cash liquidity issue. 3. It does not make the governing body do anything. 4. A city can fail because of a cash shortage. 5 What Can Cash Flow Forecasting NOT Accomplish? 5. It does not balance the budget. 6. It may not save your job. 7. It does not make coffee. 6 2

What Can You Do When A Cash Shortage Is Indicated With Your Cash Flow Forecast? Alert the governing body of impending doom. Share your plans to deal with the cash shortage.

3 What Can You Do When A Cash Shortage Is Indicated With Your Cash Flow Forecast? Alert the governing body of impending doom. Share your plans to deal with the cash shortage. Put off any large purchases until later in the year. 7 What Can You Do When A Cash Shortage Is Indicated With Your Cash Flow Forecast? Finance any large capital purchases to free up cash for operations. Quit now before your payroll check bounces. 8 REVENUES 9 3

Cash Flow Revenue Versus Budget Revenue Forecasting Cash flow forecasting determines the timing of

Revenue forecasting determines the amount of cash expected in the upcoming budget year for each

10 Frequency of Revenues One of the things that makes cash flow forecasting of city revenues

4 Cash Flow Revenue Versus Budget Revenue Forecasting Cash flow forecasting determines the timing of revenues. Revenue forecasting determines the amount of cash expected in the upcoming budget year for each specific revenue source. 10 Frequency of Revenues One of the things that makes cash flow forecasting of city revenues difficult is that there are many types of them and they do not occur at the same time, source, or amounts. 11 Frequency of Revenues Some revenues such as local sales tax comes in monthly but in varying amounts, while other revenues comes in monthly, quarterly, and once per year. 12 4

Property tax An increase in property tax rates (revenue)takes political action or passage by the governing

Property taxes usually represent a substantial percentage of the municipality s overall revenue.

anticipates collecting during the fiscal year.

5 Property tax An increase in property tax rates (revenue)takes political action or passage by the governing body. Property tax increases seldom occur during election years. Property taxes usually represent a substantial percentage of the municipality s overall revenue. 13 Property tax In forecasting property tax receipts, project only the amount of current property taxes it anticipates collecting during the fiscal year. This amount will consistently be less than the gross amount of taxes due to delinquencies. 14 Property Tax Calculate the value of one cent of the tax rate. It makes the tax increase easier to communicate to the public. 15 5

Property Tax Total assessed property value 100 x.01 = Value of one cent (gross).

gross property tax revenue as shown below. $25,000,000 100 x.

collection. Local Sales Tax distributed by the State to the County and then to the City based on sales in your City.

6 Property Tax Total assessed property value 100 x.01 = Value of one cent (gross). If the total assessed property value for the municipality is $25,000,000, each penny of property tax will generate $2,500 of gross property tax revenue as shown below. $25,000, x.01 = $2, Sales Taxes Intergovernmental State Shared Sales Tax a per capita distribution based on State wide sales tax collection. Local Sales Tax distributed by the State to the County and then to the City based on sales in your City. The taxes are distributed to cities around 2 months after collection. The actual tax amount is based on sales that may fluctuate month to month (big sales in December). 17 Other Revenues Payments in lieu of tax (PILOT) Building permits Grants Other minor revenues 18 6

Methods of Forecasting Revenues Trend analysis This is the analytical approach to forecasting revenues. Analyze the cash receipts journals from the previous 3 years.

19 Methods of Forecasting Revenues Baseline method With this approach, an assumption is made that revenues of the budget year will be similar to the previous year.

7 Methods of Forecasting Revenues Trend analysis This is the analytical approach to forecasting revenues. Analyze the cash receipts journals from the previous 3 years. Investigate any significant deviations from the trend. 19 Methods of Forecasting Revenues Baseline method With this approach, an assumption is made that revenues of the budget year will be similar to the previous year. 20 Monitor Revenue Monthly Regular monthly reviews of each revenue source is necessary. A proper review would entail comparing the revenue received this month with the revenue received this month, last year. Recommend timely budget amendments based on the monitoring. 21 7

23 Cash Flow Expenditure Versus Budget Expenditure Forecasting Expenditure forecasting

8 EXPENDITURES 22 Cash Flow Expenditure Versus Budget Expenditure Forecasting Cash flow expenditure forecasting determines the timing of expenditures. 23 Cash Flow Expenditure Versus Budget Expenditure Forecasting Expenditure forecasting determines the amount of cash appropriated for the upcoming budget year for each specific expenditure whether by department or object code. 24 8

Frequency of Expenditures Some of the things that makes cash flow forecasting of city expenditures difficult

25 Frequency of Expenditures However, expenditures for operational items such as wages are very predictable

26 Methods of Forecasting Expenditures Trend analysis This is the analytical approach to forecasting

9 Frequency of Expenditures Some of the things that makes cash flow forecasting of city expenditures difficult is that there are many types of them and they do not occur at the same time, or in the same amounts. 25 Frequency of Expenditures However, expenditures for operational items such as wages are very predictable (except for overtime). Capital purchases can often be delayed until additional revenues arrive. 26 Methods of Forecasting Expenditures Trend analysis This is the analytical approach to forecasting expenditures. Analyze the cash disbursement journals from the previous 3 years. Investigate any significant deviations from the trend. 27 9

Methods of Forecasting Expenditures Baseline method With this approach, an assumption is made that expenditures of the budget year will be similar to the previous year.

10 Methods of Forecasting Expenditures Baseline method With this approach, an assumption is made that expenditures of the budget year will be similar to the previous year. 28 Monitor Expenditures Monthly A proper review would entail comparing the expenditures this month with the expenditures of the same month, last year. Recommend timely budget amendments based on the monitoring. 29 FUND BALANCE 30 10

What is the Role of Fund Balance? Fund balance is defined as the difference between current assets and deferred outflows less current liabilities and deferred inflows.

31 Nonspendable Restricted Committed Assigned Unassigned Five Types of Fund Balance 32 Nonspendable Fund Balance This classification of fund balance includes amounts that due to their

11 What is the Role of Fund Balance? Fund balance is defined as the difference between current assets and deferred outflows less current liabilities and deferred inflows. This is same as working capital in accrual accounting. Fund balance is created only when annual revenues exceed annual expenditures. Those unspent revenues become part of fund balance. 31 Nonspendable Restricted Committed Assigned Unassigned Five Types of Fund Balance 32 Nonspendable Fund Balance This classification of fund balance includes amounts that due to their nature cannot be spent, i.e. inventory. Amounts which legally or contractually cannot be spent are also required to be classified as nonspendable. An example might include the principal in a permanent fund

Restricted Fund Balance Amounts are classified as restricted when creditors, grantors, contributors, or laws and regulations of other governments

34 Committed Fund Balance Amounts defined as committed arise from selfimposed constraints put on the use of the funds by the government s highest

An example passing an ordinance to commit $20,000 for computers. 35 Assigned Fund Balance This action may be taken by a designated body (e.g., committee), or an individual (e.

12 Restricted Fund Balance Amounts are classified as restricted when creditors, grantors, contributors, or laws and regulations of other governments impose external, enforceable, legal restrictions. They are restricted when required by law through constitutional provisions or enabling legislation. 34 Committed Fund Balance Amounts defined as committed arise from selfimposed constraints put on the use of the funds by the government s highest level of authority the full governing body. The action must be taken before the end of the fiscal year. An example passing an ordinance to commit $20,000 for computers. 35 Assigned Fund Balance This action may be taken by a designated body (e.g., committee), or an individual (e.g., city manager). Assignment of fund balance is a less formal action than required for committed funds and the action may be taken after the end of the fiscal year

It is used for any unplanned expenditure. 37 Using a Model 38 Sample Revenue Cash Flow Model For The Base or Current Year 1.

13 Unassigned Fund Balance The unassigned amounts represent those funds which are left for further APPROPRIATIONS. Unassigned fund balance can be a budget lifesaver. It can make up for a temporary reduction in revenues. It is used for any unplanned expenditure. 37 Using a Model 38 Sample Revenue Cash Flow Model For The Base or Current Year 1. Enter the revenue account number. 2. Enter the revenue account name. 3. Enter the actual revenue amount by month for the current year or year completed. 4. Leave a blank column for percentage of year todate

14 Sample Revenue Cash Flow Model For The Base or Current Year 5. Populate each monthly amount and provide a total for the year. 6. Next divide the monthly revenue amount by the total year to date amount to calculate the percentage of year to date. 40 Sample Revenue Cash Flow Model For The Base or Current Year Enter the revenue account number Enter the revenue account name. Local Sales Tax 41 Sample Revenue Cash Flow Model For The Base or Current Year Enter the actual revenue amount by month for the current year or year completed. July August September Every Month $75,129 $77,870 $73,826 $ 42 14

15 Sample Revenue Cash Flow Model For The Base or Current Year Leave a blank column each month for percentage of year to date. July % August % September % $75, $77, $73, Sample Revenue Cash Flow Model For The Base or Current Year Populate each monthly revenue amount and provide a total year to date (Example $743,562). Now divide the monthly revenue amount by the total revenue year to date amount to calculate the monthly percentage of year to date and populate the table. July % August % September % $75, $77, $73, Example of the Revenue Cash Flows JULY AUGUST SEPTEMBER ACCOUNT ACTUAL % of ACTUAL % of ACTUAL % of NUMBER NAME AMOUNT YTD AMOUNT YTD AMOUNT YTD Property Tax 75,129 77,870 73,

16 Sample Revenue Cash Flow Model For The Base Year The base or current year of the revenue cash flow model should be complete. All revenues are listed by month with actual amounts and percentage of year to date total ($75,129 ; 10.10%). 46 Sample Revenue Cash Flow Model For The Budget Year Duplicate the revenue cash flow model for the base year but without amounts or percentages. Populate the budget revenue model with the same monthly percentages created with the revenue cash flow model for the base year. 47 Sample Revenue Cash Flow Model For The Budget Year Populate the revenue budget model monthly amounts by multiplying the same monthly percentages by your budget amount. This applies the same percentage actually received last year to your new total budget amount leaving a newly calculated amount each month of the budget year. This completes the revenue cash flow projections

49 Sample Expenditure Cash Flow Model For The Base or Current Year 1. Enter the departmental expenditure account number. 2. Enter the departmental expenditure account name. 3.

17 49 Sample Expenditure Cash Flow Model For The Base or Current Year 1. Enter the departmental expenditure account number. 2. Enter the departmental expenditure account name. 3. Enter the actual expenditure amount by month for the current year or year completed. This may be by department or object code. 4. Leave a blank column for percentage of year todate. 50 Sample Expenditure Cash Flow Model For The Base or Current Year 5. Populate each monthly amount and provide a total. 6. Now divide the monthly expenditure amount by the total year to date amount to calculate the percentage of year to date

Sample Expenditure Cash Flow Model For The Base or Current Year Enter the expenditure department account number. 42100 Enter the expenditure departmental account name.

18 Sample Expenditure Cash Flow Model For The Base or Current Year Enter the expenditure department account number Enter the expenditure departmental account name. Police 52 Sample Expenditure Cash Flow Model For The Base or Current Year 53 Sample Expenditure Cash Flow Model For The Base or Current Year Enter the actual expenditure amount by month for the current year or year completed. July August September Every Month $106,597 $81,545 $99,518 $ 54 18

19 Sample Expenditure Cash Flow Model For The Base or Current Year Leave a blank column each month for percentage of year to date. July % August % September % $106, $81, $99, Sample Expenditure Cash Flow Model For The Base or Current Year Populate each monthly expenditure amount and provide a total year to date (Example $1,079,656). Divide the monthly expenditure amount by the total yearto date expenditure amount to calculate the monthly percentage of year to date and populate the table. July % August % September % $106, $81, $99, Example of the Expenditure Cash Flows JULY AUGUST SEPTEMBER ACCOUNT ACTUAL % of ACTUAL % of ACTUAL % of NUMBERNAME AMOUNT YTD AMOUNT YTD AMOUNT YTD 100 Personal Services $106,597 $81,545 $99,

58 Example of the Cash Flow Forecast Revenues and Expenditures Together BUDGETED BUDGETED MONTHLY BUDGETED MONTHLY MONTHLY CASH CASH REVENUES EXPENDITURES CHANGE BALANCE Beginning Cash Balance=

20 58 Example of the Cash Flow Forecast Revenues and Expenditures Together BUDGETED BUDGETED MONTHLY BUDGETED MONTHLY MONTHLY CASH CASH REVENUES EXPENDITURES CHANGE BALANCE Beginning Cash Balance= $1,100,000 July $514,852 $700,610 ($185,758) $914,242 August $208,003 $646,304 ($438,301) $475,942 September $376,635 $744,078 ($367,442) $108,499 October $330,004 $354,258 ($24,253) $84, What Tools Are Available to Aid in Forecasting? MTAS develops an annual publication tracking state shared taxes. LGC has a revenue forecasting model with 3 years of monthly revenues. The Office of State and Local Finance has a cash flow model

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2016 APRIL TAMCAR FORECASTING AND BUDGETING FOR REVENUES TOPICS. TOPICS (continued) 2/8/2016

2016 APRIL TAMCAR FORECASTING AND BUDGETING FOR REVENUES 1 TOPICS 1) Revenue and Cash Receipt Forecasting. 2) Frequency of Revenues. 3) The Budget Environment. 4) Methods of Forecasting Revenues. 5) What