Why a Balanced Budget Is Not Enough: A Practical Guide to Cash Flow, Fund Balance, and What Local Governments Can Actually Spend

The board adopts the annual budget. It is balanced. Estimated revenues plus appropriated fund balance equal appropriations in each fund, and everything appears to be in order. The budget lays out a plan for the full fiscal year, showing what the government expects to receive and what it is authorized to spend over that period.

A few months later, payroll is coming due, a large invoice has arrived, and cash on hand is tighter than expected. There is still room in the budget. Departments have not exceeded their appropriations. But there is concern about whether there is enough money available right now to make the payments. How is that possible?

In trying to make sense of that, board members recall that the most recent financial report showed a substantial fund balance. If that money is there, why can it not be used?

The difficulty is that each of these numbers captures a different aspect of the government’s finances. The budget is a full-year plan based on estimates. Cash is what is available at a point in time. Fund balance represents accumulated resources, but it includes more than cash and is not fully available for spending.

This post walks through how those pieces fit together. It explains what the budget does and what it means for it to be balanced, why that does not translate into cash availability throughout the year, how to track cash in practical terms, and how fund balance fits into that picture.

The Budget Ordinance: The Government’s Legal Plan for the Year

The annual budget ordinance is the foundation for a local government’s financial operations during the fiscal year. It serves as both a planning document and a legal authorization. (Capital, grant, and settlement project ordinances do the same for certain multi-year undertakings.)

The budget ordinance estimates revenues based on reasonable projections of taxes, fees, and other sources. It makes appropriations, setting legal limits on spending at the department, function, or project level. These appropriations are authorizations to spend, not legal commitments and not guarantees that money is or will be available.

The annual budget ordinance must be balanced within each fund under G.S. 159-8: estimated revenues + appropriated fund balance = appropriations. This requirement confirms that, over the course of the fiscal year (or, for a project ordinance, the life of the project), planned resources match planned spending. It does not address when money will be received or when it must be paid.

Budget Controls: Keeping Spending Within the Plan

The Local Government Budget and Fiscal Control Act includes internal controls that tie day-to-day transactions back to the budget or project ordinance. The most significant are the preaudit and disbursement requirements in G.S. 159-28.

Before an obligation is incurred, the preaudit process requires the finance officer (or board-appointed deputy) to confirm that an appropriation exists and has not been exhausted. Before a payment is made, the disbursement process requires confirmation that the obligation is valid and that an appropriation is still available to cover it.

These controls are essential. They keep expenditures within the limits set by the governing board. But they operate within the budget framework. They do not address whether cash is available at the time an obligation occurs or payment is due. A transaction can fully comply with these requirements and still create a cash strain if the timing of revenues and expenditures does not align. In other words, even with these controls in place, one critical question remains unanswered: will there be enough cash on hand when payments come due?

Cash Flow: An Issue of Timing

Cash flow answers a different question than the budget. The budget shows that the plan works over the full fiscal year. Cash flow shows whether the government can carry out that plan day to day, when bills come due and payroll must be met.

The issue is timing. Revenues are estimated at the start of the year, but they are collected unevenly over time. Property taxes, for example, often arrive later in the fiscal year. Other revenues may come in monthly, quarterly, or at irregular intervals. Expenditures follow a different pattern. Once obligations are incurred, payments must be made on a set schedule. Payroll is due regularly. Debt payments are due on fixed dates. Vendors must be paid according to agreed terms. Because money comes in and goes out on different timelines, a government can have a sound, balanced budget on paper and still run short of cash at certain points during the year.

A simple example illustrates the issue: A town adopts a $20 million budget, including $18 million in estimated revenues and $2 million in appropriated fund balance. It begins the year with $4 million in cash. Over the first three months, the town spends about $1.4 million per month on payroll and operations and makes a $400,000 debt payment. Total cash outflows are about $4.6 million. During that same period, it collects only $2.0 million in revenues because most property taxes have not yet been received. That leaves the town with about $1.4 million in cash. At the end of the next month, payroll of $1.2 million is due, along with roughly $500,000 in other obligations. The town now faces a short-term problem. It does not have enough cash on hand to cover upcoming payments, even though its budget is balanced and all spending is within approved appropriations. Nothing in this scenario violates the budget ordinance or the statutory budget controls. The plan works over the course of the year. But the timing of cash inflows and outflows creates a temporary gap that must be managed.

For budget and finance officers, this is an ongoing operational responsibility. They must monitor cash balances, anticipate when shortfalls may occur, and plan ahead to ensure funds are available when needed.

From Cash Flow to Fund Balance: Understanding the Connection

As cash is tracked over the course of the year, a predictable pattern shows up. Early in the fiscal year, cash balances often drop as payroll, debt service, and other routine costs continue, while major revenues, especially property taxes, have not yet been collected. That gap is not a problem by itself. It is part of how local government finance works. But it has to be planned for. The way governments cover that gap is by using resources carried forward from prior years. Those resources are reflected in fund balance. In practical terms, fund balance is what allows a government to keep operating when current-year revenues have not yet come in.

Cash tracking shows when those resources are needed. Fund balance shows how much is available to draw on and how long it can support operations. Fund balance, however, is not the same as cash, and it is not all available to spend. Fund balance is an accounting measure. It represents the difference between a fund’s assets and liabilities at a point in time. That includes cash, but it can also include receivables, inventories, and other assets that are not immediately spendable.

For financial reporting purposes, fund balance is grouped into five categories: nonspendable, restricted, committed, assigned, and unassigned. Nonspendable fund balance is not cash and cannot be used for operations. Restricted fund balance can only be used for specific purposes due to legal or external requirements. Committed and assigned amounts are both set aside for specific purposes, but they differ in how formal they are. Committed fund balance is set by the governing board through formal action and can only be changed by the board. Assigned fund balance reflects intended uses identified by the board or management and can be adjusted more easily. In both cases, these amounts may be available in a broad sense, but they are already spoken for. Only the unassigned portion is broadly available, and even that is often needed to support ongoing operations and manage timing differences during the year.

The North Carolina Local Government Commission (LGC) closely monitors fund balance levels as part of its fiscal oversight. Each year, local units must submit audited financial statements, and the LGC focuses heavily on the general fund fund balance percentage as a key measure of fiscal health. Using the audited financial statements, the LGC calculates this percentage by removing nonspendable amounts and certain legally restricted amounts from total fund balance and comparing the remainder to general fund expenditures and transfers out. 

The LGC uses this measure primarily for trend analysis and benchmarking. Local units are grouped based on average general fund expenditures, and fund balance levels are compared within those groups. Units that fall well below their peers, particularly those in the bottom quartile for multiple years with declining fund balance, are at risk of additional oversight, including placement on the Unit Assistance List.

This reinforces the connection between fund balance and cash flow. Fund balance is not just a long-term measure of financial position. It is also a key source of working capital. If fund balance is too low, a local unit may struggle to cover routine obligations during periods when revenues have not yet been collected. If it is sufficient, it provides flexibility to manage timing differences and reduces financial risk.

For finance officers, this means looking beyond the headline number. The key questions are how much of fund balance is in cash, how much is actually available for operations, and how much is already restricted, committed, or assigned. It also means connecting fund balance directly to the cash flow forecast. If the forecast shows a period of low cash inflow, fund balance is the resource that will be used to cover it. But if too much of it is tied up or not in cash form, the local unit may still face a short-term constraint.

For governing boards, the takeaway is straightforward. A strong fund balance is essential, but it is not a blank check. It provides working capital, helps manage timing gaps, and creates a buffer against uncertainty. Understanding how much of it is truly available, and when it will be needed, is just as important as the total amount reported.

Using Fund Balance to Balance the Budget

North Carolina law limits how much fund balance can be used to help balance the budget when the annual budget ordinance is adopted for the new fiscal year. The legal limit is set out in G.S. 159-8.  Specifically, the amount of fund balance appropriated in any fund cannot exceed: the sum of cash and investments minus the sum of liabilities, encumbrances, and deferred revenues arising from cash receipts, as those amounts stand at the close of the prior fiscal year. This limitation governs how much fund balance can be used to fill the gap between estimated revenues and appropriations. 

But this legal limit does not answer a separate, practical question: how much fund balance should be used to balance the budget, as a substitute for generating additional revenues. A portion of fund balance typically functions as working capital. It helps bridge the gap between when revenues are collected and when expenditures must be paid. Because of this timing difference, not all legally available fund balance should be committed to new or ongoing spending.

If too much fund balance is used in the initial budget, the government may face cash pressure later in the year, even though the budget remains balanced and all legal requirements are met. In practice, finance officers and governing boards must consider both the legal limit on appropriation and the need to retain sufficient cash to support operations throughout the year.

How to Track Cash in Practice

The issue, then, is not just understanding cash flow but managing it. That starts with a clear, practical approach to tracking how cash will move during the year. The steps below provide a framework for doing that.

Step 1: Understand the Cash Cycle and Set a Baseline

Most local governments follow a consistent pattern within the fiscal year. Cash balances often decline early in the year as expenditures continue while major revenues, especially property taxes, have not yet been collected. Later in the year, those revenues come in and balances recover.

Start by confirming that pattern for your unit. Reviewing monthly cash balances for the past two or three years will show when cash is typically highest, when it is lowest, and how deep that low point tends to be. That pattern becomes the baseline for the current year.

Step 2: Build a Forward Projection Focused on Timing

Using that baseline, develop a projection for the current fiscal year. Begin with current cash on hand, then map when major revenues will be received and when significant expenditures will be paid. A simple monthly projection is usually enough to show how cash will rise and fall over time.

Step 3: Identify the Low Point and Stress Test It

The most important output from the projection is the lowest cash point. That point shows when the unit is most exposed. Once identified, it should be tested to ensure the unit can absorb at least some disruption. This does not require complex modeling. A few reasonable adjustments are usually enough, such as slower revenue collections or earlier-than-expected expenditures. The goal is to confirm that the unit can get through that period without running short of cash, even if conditions are not ideal.

Step 4: Coordinate with Departments on Spending Timing

Cash tracking depends on when money is actually spent, not just what is budgeted. Finance officers should communicate with departments to identify large purchases, capital activity, and changes in spending patterns. Payments that are concentrated during a low-cash period can create pressure even when they are fully budgeted. Regular coordination helps align spending with available cash.

Step 5: Connect Cash to Fund Balance

A portion of fund balance functions as working capital. It allows the unit to operate during periods when revenues have not yet been collected.

Finance officers should assess how much fund balance is actually in cash, how much is restricted or committed, and how much is needed to carry the unit through its lowest cash period. This often defines the practical limit on using fund balance.

Step 6: Monitor, Update, and Adjust

Projections should be updated regularly as actual revenues and expenditures come in. Even monthly updates are usually sufficient to adjust timing assumptions and identify issues early.

Assumptions should also be revisited each year. Changes in revenue timing, debt service, or capital activity can shift the cash cycle. Broader economic or operational shocks can affect both inflows and outflows, and projections should be flexible enough to reflect those changes.

Step 7: Scale the Approach to Your Unit

The level of detail should match the size and complexity of the government.

Smaller units can often manage with a simple monthly projection focused on major revenues and expenditures, combined with regular communication with key departments. Larger or more complex units typically need more structured forecasts, tracking by fund, and more frequent updates. In both cases, the objective is the same: understand when cash will be lowest and ensure there are enough resources to get through that period.

Conclusion

A balanced budget, sufficient fund balance, and strong internal controls are all necessary, but they do not answer the same question. The budget shows that the plan works over the year. Fund balance shows accumulated resources. Cash determines whether the government can meet its obligations when they come due.

The key is to connect all three. Track cash regularly, understand how much fund balance is truly available, and plan for the timing of revenues and expenditures. Doing so helps avoid short-term pressure, supports stable operations, and puts the government in a stronger position to respond when conditions change.