What to Analyze?
Financial Trend Monitoring: Tracking Fiscal Health in Montana Local Governments
A local government’s financial trend monitoring system can be wide‐ranging and cover a multitude of variables or it can be quite simple. Simple monitoring systems can be very effective, especially for small governmental entities. At a minimum, the clerk‐treasurer should establish a formalized annual monitoring system of the financial position of its major funds. This analysis will assist the clerk‐treasurer in understanding the “big picture” of his/her government’s finances and will act as an early warning mechanism for emerging problems. Financial trend monitoring books are available and provide examples of the many kinds of analyses that can be performed. However, once the local finance professional is able to master monitoring of the city’s financial position, monitoring of other variables becomes increasingly easy and is just an extension of the same principles. The financial position of a local government is best measured by what accountants call fund balance. Fund balance is defined as the assets of a fund (primarily cash & accounts receivable) less liabilities of a fund (primarily accounts payable). In other words, fund balance essentially means the net worth of a fund at any given point in time- typically at the end of the fiscal year. However, the trend of the financial position of a fund is much more important than its absolute value, thus, setting up the need for a multi‐year trend analysis. The term fund balance applies only to governmental funds, which includes the city’s general fund, special revenue funds, debt service funds, and capital project funds. Accounting requirements for the city’s proprietary funds (enterprise funds) are different and so is the financial analysis that is needed for these funds. The best
measure of the financial position of an enterprise fund is working capital. Working capital is defined as the current assets (primarily cash & accounts receivable) of the fund, less current liabilities (primarily accounts payable) of the fund. Current means due within one year. Therefore, a wastewater system’s physical plant would be excluded from the calculation as would the associated debt (bonds payable) of the wastewater plant. The end result is the fund’s liquid net worth. The city’s audited financial statements will separately identify the
current assets of an enterprise fund as well as the current liabilities, making this analysis relatively easy. In lieu of evaluating fund balance and working capital levels, some local governments (primarily smaller units), opt for a simpler approach- that is simply monitoring cash balances. While analyzing cash balances may occasionally omit some critical information, such as a large payment the government is due or a large disbursement that just occurred after year‐end, the simple monitoring of each fund’s cash balance can provide the smaller local governments with an effective alternative to evaluating fund and working capital balances.
Regardless of the approach, it is critically important that the clerk-treasurer perform a financial trend analysis of its entity’s financial position on an annual basis, develop a multi‐year trend analysis and regularly present this information to the city council. This information is absolutely critical to an elected official’s understanding and management of the city or town’s finances. Once the financial analysis is performed and any unwanted or danger trends are revealed, the next step is to identify the primary causes of the changes in financial position. For example, fund balance in the general fund could be declining for three or four years in a row. The fact that fund balance is declining does not automatically indicate a problem. The government could be making a concerted effort to repair or replace needed equipment,
fully understanding the impact on its general fund. Assuming the government has adequate reserve levels; this situation does not necessarily indicate an impending problem. The reason is that the expenditures causing the decline in fund balance levels can easily be eliminated in subsequent years. On the other hand, fund balance in the general fund could be declining due to increased on-going/recurring costs, which poses an entirely different situation, resulting in a structural imbalance in the budget.
measure of the financial position of an enterprise fund is working capital. Working capital is defined as the current assets (primarily cash & accounts receivable) of the fund, less current liabilities (primarily accounts payable) of the fund. Current means due within one year. Therefore, a wastewater system’s physical plant would be excluded from the calculation as would the associated debt (bonds payable) of the wastewater plant. The end result is the fund’s liquid net worth. The city’s audited financial statements will separately identify the
current assets of an enterprise fund as well as the current liabilities, making this analysis relatively easy. In lieu of evaluating fund balance and working capital levels, some local governments (primarily smaller units), opt for a simpler approach- that is simply monitoring cash balances. While analyzing cash balances may occasionally omit some critical information, such as a large payment the government is due or a large disbursement that just occurred after year‐end, the simple monitoring of each fund’s cash balance can provide the smaller local governments with an effective alternative to evaluating fund and working capital balances.
Regardless of the approach, it is critically important that the clerk-treasurer perform a financial trend analysis of its entity’s financial position on an annual basis, develop a multi‐year trend analysis and regularly present this information to the city council. This information is absolutely critical to an elected official’s understanding and management of the city or town’s finances. Once the financial analysis is performed and any unwanted or danger trends are revealed, the next step is to identify the primary causes of the changes in financial position. For example, fund balance in the general fund could be declining for three or four years in a row. The fact that fund balance is declining does not automatically indicate a problem. The government could be making a concerted effort to repair or replace needed equipment,
fully understanding the impact on its general fund. Assuming the government has adequate reserve levels; this situation does not necessarily indicate an impending problem. The reason is that the expenditures causing the decline in fund balance levels can easily be eliminated in subsequent years. On the other hand, fund balance in the general fund could be declining due to increased on-going/recurring costs, which poses an entirely different situation, resulting in a structural imbalance in the budget.