Lisa F.
Lisa F

Financial uncertainty, disrupted working arrangements, and health concerns are creating stress within workforces and impacting the future of organisations globally. In these times of economic uncertainty close monitoring of cash balances and managing cash flows becomes even more critical.

In our report to parliament Local government entities: 2017–18 results of financial audits (Report 18: 2018–19), we discussed the importance of the cash expense cover ratio. This ratio compares a council’s unrestricted cash balance with its total payments for operating and financing activities. It represents the number of months the council can continue operating based on current monthly expenses, without revenue inflows.

Better practice suggests a forecast cash expense cover ratio of greater than three months is adequate when operating under business‑as‑usual conditions, to act as a buffer for unexpected contingencies. But current circumstances are far from business as usual. For many councils, COVID‑19 may result in a loss of revenue from key sources while incurring unplanned spending in response to community needs. This may have a significant impact on councils’ cash flows and cash reserves.

During these unprecedented times, councils will need to make informed financial decisions. We encourage councils to:

  • understand cash flows and their overall cash position, including their cash expense cover ratio, to maintain adequate cash reserves
  • review costs to separate core/fixed costs from variable/discretionary spending, and identify savings or costs that they can defer
  • perform short-term cash flow forecasts and use financial modelling to make informed decisions. They should frequently revisit cash flow forecasts to reflect changing circumstances
  • consider adjusting service levels to manage costs. Our recent report Managing the sustainability of local government services (Report 2: 2019–20) highlights why this is important. We also have a simple cost value tool to help councils prioritise their actions
  • revisit the timing of capital projects and reprioritise where necessary. Forecast the impact on short- and medium-term cash flows of bringing forward, or pushing back, major new works and asset replacements. There will be pros and cons of each approach
  • model the impact of the various types of support/relief packages they are considering for their communities on their budgets. Councils should consider the longer‑term impacts of these measures, in particular rate freezes or payment relaxation measures
  • identify and consider challenges and risks to rapid implementation of any community support packages they are offering
  • ensure they regularly update councillors, executive leaders and audit committees as changing circumstances impact cash and budget positioning
  • understand how their council-controlled entities are managing their cash flows. Each council should ensure it has appropriate oversight of their activities.

If skills are not readily available in-house, seek help. There are multiple avenues that councils can consult and obtain advice and tools from: Queensland Treasury Corporation; the Department of Local Government, Racing and Multicultural Affairs; Queensland Audit Office; and their internal auditors.

The financial impact of COVID-19 will last beyond the 2020 financial year. While understanding the short-term impacts is important, councils will also need to understand how the loss in revenue and any support packages offered to communities impact their long-term sustainability and their going concern assumptions for the remainder of the 2020 financial year and the 2021 budget.

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