One Working Capital Management Strategic Tool: Interfund Transfers

By Michelle Lofton and Mikhail Ivonchyk Working capital management is a managerial strategy that monitors and uses current assets (e.g., cash, accounts receivable, and inventory) and current liabilities (e.g., accounts payable and notes payable) to ensure smooth operations. The purpose is to maintain cash flows for liquidity to meet short-term operating expenses and obligations. This integral part of sound financial management uses a variety of strategic tools to manage cash flows. These can include the use of unrestricted cash, savings, interfund borrowing, interfund transfers, delaying payments, receivables, a line of credit, direct lending arraignments, and short-term debt. Yet, little academic research on governments has evaluated the process for selecting different tools, the policies governments have in place to implement them, and the consequences of using one tool over another. In our research study, we evaluate one working capital management strategic tool: interfund transfers. Interfund transfers are defined as flows of assets (such as cash or goods) without equivalent flows of assets in return and without a requirement for repayment. There are several purposes for interfund transfers such as subsidizing operations, upholding statutory spending requirements, supporting capital projects, and paying for debt service. For example, a public manager can use interfund transfers to