Monday, May 31, 2010

What in the world is free cash?

The first thing to remember is that it is not free and it is not cash, to quote a former Deputy Commissioner of Local Services. The Bureau of Accounts (BOA) defines free cash as the amount a community has accumulated when actual revenue collections exceed the budget estimates used when setting the tax rate and/or actual expenditures or encumbrances (committed funds not yet expended) are less than appropriations. 

Since free cash is a non-recurring revenue source, good financial management dictates that it should not be relied upon to fund operating budgets but rather should be used for one-time purposes such as capital purchases or appropriations to supplement the stabilization fund.
From Dec 2000 MA Gov publication found here (PDF)

So what does this mean in everyday English?

Suppose in your household budget you allocate $100 per week for food. You track all expenses diligently and at the end of the period you realize that while the budget for the year was $5,200 you actually spent only $4,900. The difference between the budget amount and actual expenditures would be money that you can use for other purposes in the household. As controller of the household funds, this would be an easy decision. At the Franklin budget level, the funds need to be certified by the State before they can be determined as "free cash" and used for another purpose.

Suppose in your household budget, along the way, you realize that while you budgeted $100 for electricity, you tend to be running expenses more than $100. If you can cut your usage, you should try. Otherwise, at some point you need to find another account (source of money) to cover for running over budget. Combining the example above, you might be able to take the extra food money to cover for the electricity shortage. If you don't have such a source, then you look to cut something somewhere to meet the budget without going into debt.

Does this help?

Franklin, MA

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