Time to Start the Budget

The budget or one year focus makes the flow of current financial resources a natural derivative for determining what to include in the governmental funds. Cash, temporary investments, supplies, and accounts payable are all short term and therefore included in governmental funds. Long term items are excluded unless part of the long term item comes due during the budget period and must be paid in cash. The fund financial reports then allow for financial analysis based on budget compliance. In the private sector, there are groups of ratios used to determine a business’s liquidity, solvency and profitability. A municipality can review its liquidity and solvency but does not have a profitability section; however, analysis of the unreserved fund balance, serves a similar purpose.
The endorsement given to the liquidity approach goes with the propensity in municipal government to promise now and pay later. Balanced budgets do not halt this tendency because the budgets are operated on a cash oriented basis. That is to say, if only a small part of the promise or none at all needs to be paid this year, then only the amount demanded is legally due and needs to be included in the budget. In fact, municipalities can use borrowing in the financial statements to balance spending. The business model does not allow borrowing to increase equity (income) to offset spending.