Utilizing Cash Flow Forecasting

When I first joined the city, its financial position was dire. It had even made The Wall Street Journal as one of the largest U.S. cities with the lowest cash on hand. Worse, most of that cash was sitting idle and uninvested due to mismanagement. The city’s current cash assets were lower than its liabilities for accounts payable and payroll. What kept the city afloat was a tax receivable set to arrive in January for the December 31 year-end. The city was, essentially, on financial life support but didn’t realize it. 

While most governments won’t collapse solely due to short-term cash shortages, versus long-term mismanagement of liabilities or labor contracts, cash is still king. With a pooled fund approach, governments often ensure there’s money in the bank, but shortfalls in specific funds still occur. That’s why rolling 12-month cash forecasting is vital to managing idle cash and the timing of inflows and outflows. 

Cash forecasting is essential to understanding how various funds operate. For example, funds like the general fund might see a few large deposits during the year, such as property tax payments. By contrast, enterprise funds, like water utilities or golf courses, experience seasonal cash flow, with peaks in summer and dips in winter. Forecasting helps manage these differences by ensuring funds have the liquidity to meet bond payments, payroll, utility costs, and other operational needs. It also helps optimize interest revenue from investments.  

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The GFOA strongly recommends ongoing cash forecasting to ensure sufficient liquidity, reduce idle cash, and avoid cash flow crises. Cash forecasts should cover a rolling 12-month period instead of just a fiscal year. They should also be updated regularly—monthly for most governments or daily/weekly for more complex ones. 

Cash forecasting is an essential tool for public sector organizations to manage their funds effectively and prepare for both short-term and long-term needs. Here’s how to put it into practice, along with key steps to follow:

Key Steps for Applying Cash Forecasting: 

• Gather Historical Data: Collect past records of cash inflows (like taxes or grants) and outflows (like payroll and expenses) to understand trends. 

• Engage Stakeholders: Work with departments like finance, operations, and revenue-generating divisions to include all sources of cash flow. 

• Use Tools and Software: Implement forecasting tools to improve accuracy, speed, and consistency while minimizing errors. 

• Run "What-If" Scenarios: Prepare for uncertainties by modeling possible situations, such as revenue decreases or unexpected expenses. 

• Set a Review Schedule: Regularly update forecasts—monthly or quarterly—to reflect real results and new information. 

• Monitor Liquidity: Use forecasts to ensure there’s enough cash for daily operations, emergencies, and future goals. 

• Optimize Surplus Funds: Invest excess cash wisely to maximize returns while maintaining safety and liquidity. 

• Ensure Transparency: Share forecasts with stakeholders to promote accountability and demonstrate responsible money management. 

• Follow Financial Policies: Use forecasts to stay compliant with rules and regulations governing public funds. 

• Prepare for the Future: Build financial resilience by using forecasts to strengthen long-term sustainability and plan for economic changes. 

By following these steps, organizations can create forecasts that guide smarter decisions, help maintain stability during tough times and ensure that funds are used responsibly. This process is not just about meeting current needs—it’s about building a stronger financial future.

New tools are making cash forecasting easier. The GFOA offers Excel-based models for members to use, like the one at the link below:

https://www.gfoa.org/materials/cash-flow-tool

Companies like DebtBook are also introducing cash forecasting software designed specifically for governments.

By adopting strong cash forecasting practices, governments can take control of their financial future and avoid the pitfalls of mismanagement. Forecasting is more than just a technical exercise; it’s a proactive strategy that ensures liquidity, optimizes resources and builds resilience against economic uncertainty. Public sector organizations can transform their financial operations from reactive to strategic with the right tools, regular updates, and a collaborative approach. Whether facing day-to-day operational needs or planning for long-term goals, cash forecasting empowers governments to make informed decisions, safeguard taxpayer dollars, and strengthen trust with their communities.