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What is a monthly financial
report and why is it necessary?
A monthly financial report creates
a snapshot of an organization's financial situation by reporting
on its revenues and expenditures (money in and money out).
One of the goals of a monthly financial report is to compare
the monthly and year to date activity against the amounts
budgeted to ensure the municipality is on track with its budget
projections. If there are any areas where the organization
may be overspending or under-receiving, this could require
adjustments to the budget to ensure the organization can meet
its goals.
What is included in a monthly
financial report?
At a minimum, the council should
see the month's income, expenses, current reconciled bank
statement, and a current summary showing the monthly expenses
compared to the approved budget for that fiscal year.
There are many types of financial
reports. The most common type of financial report is a simple
comparison of revenues and expenditures. (This type of report
when used in business is often called a "profit and loss
statement.")
Since the business of government
is not to generate profit, the purpose of a report to a governing
body is to keep it informed and ensure that the finances are
adequate to provide the services and accomplish the goals
identified for the fiscal year. A monthly financial report
to a local government should, at a minimum, compare actual
revenues and expenditures with the amounts budgeted.
The standard report format recommended
for use by local governments is a report by department or
project/service and line item and includes the following information:
- Budget amount;
- Activity for the month;
- The total amount year to
date; and
- The difference between the
year to date amount and the budgeted amount (balance remaining).
What should I do if I don't
get a monthly financial report?
State law (AS
29.20.500) requires that the chief executive officer
(mayor or manager if manager form of government) provide monthly
financial reports to the governing body. If these have not
been provided on a monthly basis, find out the reason and
work to correct the problem. Without a financial report the
local government cannot manage its assets or ensure that the
residents are receiving the maximum benefit from their public
resources. The financial report must also be available to
the public.
What should I be looking
for in a monthly financial report?
A monthly financial report will
tell you whether or not you need to make changes and will
serve as the indicator of the financial health of an organization.
At a minimum the financial report should clearly relate to
the approved budget. You can expect to see whether or not
you are on track for receiving money identified in the budget
and whether you are spending in accordance with the budget
and at the rate you had expected.
It is not always easy to interpret
a financial report - most elected officials are not accountants,
so the report needs to be as simple and user friendly as possible,
while still providing the important information. One easy
thing to spot, if the report format is set up correctly, is
the relationship between actual revenues and expenditures
to what was projected in the budget. If there is a
large difference between what is actually being received and
spent and what was projected in the budget, it may mean that
what was planned for in the budget is not going to happen.
This may require adjustments to the budget and changes in
the way the municipality is doing business.
A few indicators of problems
that a monthly financial report will reveal are:
- reported actual revenues
are not enough to meet expenditures;
- increasing debt because of
insufficient revenues;
- uncollected payments for
services;
- unpaid payroll taxes because
of cash shortages;
- grant revenues being used
to cover the operational costs of the government; and,
- large increases in the costs
of certain services or departments over historic levels.
These are only a few of the
things to look for in a financial report.
How do I read and use the
information in a monthly financial report?
To analyze financial reports
you need to ask some questions and try to determine the answers
from the financial report. These questions include:
- Are revenues being received
as planned in the budget? If revenues are collected
or received regularly, you should be able to see if the
rate you are receiving is more or less than what was planned
in the budget. For example, let's say it's the third month
of the fiscal year. I.H.S. Health Clinic Lease payments
are received each month. Since you are one-fourth through
the fiscal year (3 months divided by 12 months in the year)
your financial report should show one-fourth of the budgeted
revenues for the clinic have been received. If it doesn't,
you should ask questions of the administrator or manager.
Another example might be State Revenue Sharing, which is
received once a year, usually in July. This payment is typically
one of the largest your community will receive for the year.
If your financial report for July or August does not show
that this money has been received, you need to ask questions
of the administrator or manager.
- Are there enough liquid
assets (cash and its equivalent) to pay the bills? Many
organizations have trouble with cash flow. Even though the
local government may have enough revenues to cover expenditures
during the fiscal year, it may not have the cash available
to make important purchases when it is needed. Therefore,
the Council needs to have a report on bank balances and
other liquid assets as well. For example, you know that
heating fuel is available for delivery by barge only a few
months of the year. To meet this expense, enough cash needs
to be set aside and available to make the fuel purchase
when needed. Obviously the costs of operating government
will be a lot higher if the purchase cannot be made when
the barge is available, since a barge can deliver fuel much
cheaper than flying fuel to a community in winter.
- Is more money being spent
than was planned for in the budget? If the budgeted
amounts are more than what was planned, the municipality
is risking going broke as the year progresses. If general
operating expenditures seem normal, you need to check if
the monthly expenditure rate is really more than you planned
for in the budget. As described above, with a little simple
math you can calculate whether expenditures are being made
at a greater rate than originally planned. You may also
have large expenditures that are not made on a regular basis.
An example of this type of expense is insurance. Insurance
payments are often made once a year. You need to be aware
of when this payment is due and when it shows up on the
financial report to compare what was planned in the budget
to what it actually costs. If there is a big difference
you should be asking questions.
- Are there large Accounts
Receivable? Accounts receivable is money owed to the
municipality from service charges, such as water and sewer
payments, fuel sales, etc. The municipality should be getting
regular payments for services it provides. If the payments
are not being received in a timely manner, there may not
be as much money available as was projected in the budget.
Some municipalities do not pay enough attention to billing
and collecting the money owed. The result is an increasingly
large accounts receivable. Again the income statement may
not clearly show why revenues are not being received and
you may have to ask for a report on accounts receivable.
If you have municipal services that are supported through user fees,
you need to be especially aware of the rate that payments are being collected.
- Are grants being properly
managed? The financial report should include a section
reporting grant activity. It should show the revenues received
for the grant and the expenditures that were made from the
grant funds. Some common problems include expenditures that
are not an appropriate use of the grant funds. Grant revenues
are restricted to the purposes identified in the grant agreement.
If charges are made incorrectly to the grant, the municipality
may have to reimburse the granting agency, or may lose the
grant altogether. Another problem is not charging the grant
for expenditures that are in fact appropriate. It often
happens that expenditures that could be legitimately charged
to a grant are not. This may be because the bookkeeper is
unaware of what should be charged to the grant or it may
be because the bookkeeping system is not operating properly.
Either way the municipality is losing money when it does
not charge the grant for eligible expenditures. An example
that comes up frequently is the cost of audits. If grants
contribute to the costs of your annual audit, most grants
can be charged for the cost of that part of the audit. If
the grant represents 50% of your revenue, then the grant
can usually cover 50% of the cost of the audit. Review the
grant portion of your financial reports carefully to check
for these kinds of issues.
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