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The Down and Dirty of Cash Flow Analysis

Cash flow analysis, also known as cash flow forecasting, is an estimate of receipts and disbursements during a given period. When executed properly, it can lead to the optimization of investment choices while insuring liquidity needs are properly met. As experienced professionals in this area, Michigan CLASS is here for you and happy to help set you on a better course for your short-term investment needs via a well-thought-out cash flow analysis.

Below are some key points and recommendations regarding the creation of an optimized cash flow analysis model for your organization.

  • Managing liquidity is a simple but important function. It is important to make sure invested funds are properly managed.
  • Cash flow analysis and liquidity management are different but work well together.
    • Cash flow analysis serves as the basis for proper liquidity management.
  • When creating a cash flow analysis model, ask yourself the following questions:
    • How much cash is available?
    • When will it become available?
    • How long will it be available?
  • The best format for you will depend on the size of your organization, the volume, and the complexity of transactions.
  • One of the most popular types is the annual forecast.
    • Others include monthly and weekly forecasts and project-based forecast.

For more detail, please reference the Government Finance Review’s article “Liquidity Management Made Easy.” Finally, the Government Finance Officers Association recommends the following six steps for a cash flow analysis. These steps are shortened for length, but you can read the full version here.

  1. Create a pooled portfolio of operating funds across all funds excluding unspent bond proceeds.
  2. Consider historical information and projected financial activity.
  3. Compare cash flow results with projections and determine reasons for differences.
  4. Make conservative assumptions on analysis and update them regularly.
  5. Monitor cash positions daily to ensure sufficient liquidity.
  6. Use an appropriate tool for conducting a cash flow analysis.

If you have any questions, please feel free to contact a Michigan CLASS representative today.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.