COVID-19 has brought volatility to the value of many investments, including those of public sector entities.
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:
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.